It is always interesting to me the way the simple word “budget” can cause a person
to roll her eyes and groan with loathing. I remember the first time my husband found
the file where I was beginning to build a budget for our household. He called me
from the other room and said quietly, “What is this?” as he pointed to the computer
screen. I could have knocked him over with a feather he was so nervous. In his mind,
a budget was something meticulous and confining, a killjoy ready to snatch his fun
away at any second. Unfortunately, there are many people out there that feel the
same. If you are one of them or if you would just like some help getting started
on a budget, the following budget basics are for you.
1. Understand the purpose of a budget.
A budget is a tool created by you to work for you. The ultimate purpose of a budget
is to organize your financial information in such a way that will empower you to
be a successful money manager. Whether your current financial situation is good,
bad, or downright ugly, a carefully planned budget can help you live within your
means and reach the financial goals that are most important to you and your family.
2. Track monthly income and expenses.
This is the first and most important step toward improving your money management
skills. I recommend spending at least a month (two or three months if you can) gathering
and recording your income and expenses. It will take some time to sort through everything
and get a firm grasp on all of your spending. Be honest with yourself about your
expenditures and try not to judge them at this point. The bottom line is that you
need to know exactly where your money is coming from and where it is going each
To begin tracking monthly income and expenses, sit down with your paycheck stubs,
checkbook, bank statements, credit card statements, and any other appropriate financial
information. Some of your expenses, such as insurance, trash, or real estate taxes,
probably occur less frequently than monthly. These items should be multiplied by
the number of times you pay them and divided to determine a monthly amount.
$45 trash bill X 4 payments per year = $180/12 months = $15 per month
Some households may have fluctuating incomes. If this is the case, budget your monthly
income by conservatively estimating what your annual income is likely to be, then divide by 12.
You may find it helpful to organize your income and expenses into the categories
listed on the budget worksheet.
3. Pay attention to the small stuff.
Do you stop for coffee every morning on the way to work? Or maybe treat yourself
to a soda while you are out running errands? It is
surprising how these so-called
small expenses can add up and become a significant part of your monthly spending.
Suppose you spend $2 on coffee each weekday morning. This is a monthly expense of
roughly $40 or an annual expense of about $480. Other expenses that can seem insignificant,
but add up over time include parking, fast food, snacks, dry cleaning, car wash,
etc. If you sometimes think there must be a hole in your wallet, it is probably
because of these types of expenses.
As you track your monthly expenses, make your best effort to include absolutely
everything. If you put a quarter in a vending machine or spend a dime on a library
fine, write it down. It may help to carry a small notebook with you to record expenses
while they are fresh in your mind. If you are diligent in recording small expenses
on a day-to-day basis, the result of your efforts will be the knowledge you need
to control your spending in this area. You will immediately identify expenses that
you can eliminate or substitute without much sacrifice. On the other hand, you may
consider the price of your morning coffee to be well worth it, and that is OK! The
important thing is to know exactly how you spend your money.
4. Plan the budget.
After a month or more of carefully tracking income and expenses, (the major items
as well as the small stuff) it is finally time to plan the budget.
Take the list of income and expenses you have collected and subtract total expenses
from total income. For this calculation, it is important to take your time, include
everything, and double check to make sure it is correct. The result of the calculation
is the difference between what you make and what you spend on a monthly basis. If
income exceeds expenses, you only have to use your budget to monitor future spending
and to help you reach future financial goals. If expenses exceed income, keep your
chin up, because now that you are fully aware of the situation, you can take steps
to turn it around.
An analysis of each budget category will help you to determine how you can reduce
your monthly expenses. Variable expenses such as groceries, clothing, entertainment,
dining out, and miscellaneous expenses are generally the best candidates for trimming.
As you consider each expense, be creative and think of the most enjoyable (or least
painful) way to reduce it. Ask yourself the tough questions: Do I really need this
item or service? Would my quality of life be diminished without it? Can I substitute
a free or lower cost alternative? How much could I save by learning to do-it-myself
or make-it-myself? (Often you will save a bundle.) For lots of great specific money
saving tips, please read the various MomAdvice articles on this topic.
After you have evaluated your expenses and planned a workable budget, take a moment
to congratulate yourself for your hard work. You are probably already a better money
manager than when you started, and your efforts will benefit everyone in your household.
Please remember that it may take some time for your budget to work as smoothly as
you would like. It is normal for a budget not to balance the first month. It simply
takes time to adjust your planning to your actual needs. However, in the long-term,
budgets do work and yours will be a wonderful tool to help you achieve the financial
goals you most desire.
*Don’t forget to swing by our downloads
section to download Beth’s free Budget Worksheet*