Budgeting Basics

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 month.

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.

Example:

$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*