Kelly Whalen

Budgeting 101: 5 Easy Steps to a Budget that Works

From our money & finance contributor, Kelly Whalen.

I am so excited to introduce you to Kelly Whalen from The Centsible Life. Not only is Kelly a fantastic resource on frugal living, but she is also a dear blogging friend! Kelly has promised to walk us all through the basics of budgeting from start to finish so that you will be able to have a stronger grasp on managing your family’s personal finance. No matter when you join us, you can go back through our archives and read all of Kelly’s words of wisdom on money management. I am so thrilled she is joining us! 
Budgeting 101

Creating a budget will allow you to take charge of your money and save more than ever before. You may also find that you are able to spend on the things that matter to you whether that’s travel, home improvements, or charity when you have a budget in place.

In today’s post I’ll show you 5 easy steps to create and keep track of a budget that will really work for you and your family.

1. Where is your money now?

The 1st step to creating a budget is to sort out what accounts you have and where. For some folks this list will be small, but you may find between savings, checking, retirement, college savings, and credit cards you have more than a handful of accounts to track.

The simplest way to do this is to make a list. Include what you owe, what you’ve saved, and all your assets (savings, cars, your home, etc.). You can find a printable debt tracker at my site.

In addition to knowing where your money is you can easily tally up your debts and your assets to find your net worth too.

What is Net Worth? Assets (money, investments, value of your property) – Debts = Net Worth

Below you’ll see an example of how to calculate your net worth:

$25,000 (emergency savings) + $75,000 (retirement accounts-401k and Roth IRAs) + $125,000 (value of home) + $25,000 (value of cars)= $250,000 in assets

$5,000 (credit card debt) + $10,000 (car loan) + $15,000 (student loans) + $75,000 (mortgage)= $100,000 in debt

$250,000- $100,000= $150,000 (Net Worth)

2. What are you spending?

Now that you know what money you’ve accumulated it’s time to look at where you are spending your money. Gather up the last three months of bank and credit card statements and let’s dig in.

To start, you’ll want to use a handful of categories. If you’re using a pen and paper you can choose the categories that make sense for you. If you are using a website, app, or program like Mint or Quicken you can use their preset categories.

Some examples of categories are:

  • Savings, Retirement, and Investments
  • Charity
  • Rent/Mortgage
  • Childcare
  • Healthcare
  • Insurance (Car, Health, Life, Home, Renter’s, etc.)
  • Loans and Debts
  • Maintenance (Car & Home)
  • Entertainment (including outings and services like Netflix or cable)
  • Clothing and Personal Care
  • Food and Dining Out
  • Travel
  • Hobbies or Allowances (for kid or adult allowances)
  • Holiday
  • Misc.

With 3 months of data on hand you can see some slight fluctuations like spending increasing at the holidays or dining out costs going up when work is busy.

Now that you have that data, take a deep breathe. That’s what you did spend, and your future spending and saving habits are going to change with our next step.

3. What are your goals?

Most often we’d jump into what to cut, and we might even judge ourselves a bit when we see how much we really spend on manicures or on our kids’ clothes. Instead let’s turn that around and focus on the positive. What are your personal goals? What are your goals as a family? As a couple?

It’s time to sit down and think about what you want your money to do for you. After all, we work hard for every dollar so it should work hard for us, too!

I find this process works best if you lay out not only your own goals but the goals of your spouse or partner and family as well. For instance, your #1 personal goal may be to save for an anniversary trip with your spouse, but that goal could effect a family goal to get a family pet, or your partner’s goal to have an emergency fund that would last you a full year.

Start by writing out every goal you have. Do you have a ‘life list’ or ‘bucket list’? Include some money that will go towards those goals. Next you’ll want to order your goals. Now some will be tie for a spot on your list, and that’s ok. The idea is we want to bring the most important things to the forefront.

I recently shared this concept with a reader who sent back this list after she and her family prioritized their goals.

  1. Emergency Saving: Emergency Fund for 1 Year’s Expenses
  2. Reduce Food Spending: Learn to cook more meals, find ways to slash budget 25% by end of year.
  3. Family Trip: Save for a family trip to the Grand Canyon.
  4. Pay off ALL Student Loans: Get rid of our student loan debt by 2015.
  5. Fully Fund College Savings: Make sure both girls have enough in their accounts to fully fund their tuition.

While there were many other things the family wanted to do with their money these goals were their top 5. Once they have completed the goals they have outlined they can bump up more items from their list or reassess their goals.

Bonus Tip: Make a vision board to create a visual reminder of your goals (such as a photo of the Grand Canyon) and create a spreadsheet to track your progress.

4. Stop spending on ‘stuff’ you don’t care about.

Now that you know where your money is, where your money has been going, and where you want it to go it’s time to start making that happen. Now is the time to get really serious about where you want your money to go. Look at each and every category and assess if it’s worth the money it’s pulling away from your goals. In some cases we have no choice (yes, you need to pay your mortgage) but you can often reduce or eliminate some of your expenses.

For instance, cable TV is a great example of an unnecessary expense. Your cable bill may be close to $50/month or more if you have speciality channels. Consider cutting the cable. You can watch less TV and utilizing free or low-cost services to watch some TV and movies.

I call this process an expense audit. Each expense will be considered. Can you reduce it? Eliminate it? Choose a lower cost provider?

5. Make a budget.

Only after steps 1-4 are you able to make your budget. Using the same categories you used to assess your spending create a budget based on what you have been spending. While it’s tempting to say you’ll slash your grocery budget from $1,000 to $500 it’s not very realistic. Start with where you are, and as your spending decreases or your dump expenses that you’ve opted to do without you can adjust your budget.

The key to remember is once you’ve made a budget that it is NOT set in stone. It will guide you when it comes to your spending habits, but your budget should shift as you reduce expenses and focus on reaching your goals.

Bonus Tip: Remember that your financial goals are personal. Keep yourself on track by reminding yourself of your goals, and not looking at what the Joneses are spending.

Let’s look at a sample budget to help you get the idea.

Anna’s Family Budget
(Based on $3,000/month income after taxes, 401ks, health care premiums)

  • $250 – Savings (Retirement goes directly to her 401k)
  • $125 – Charity
  • $850 – Rent/Mortgage
  • $150 – Childcare (after-school)
  • $125 – Healthcare (this is an average spent per month on co-pays and medication)
  • $100 – Insurance (Car, Health (premiums come out of paycheck), Life, Home (included in mortgage))
  • $200 – Loans and Debts (Student Loans)
  • $200 – Maintenance & Gas (Car & Home)–goes into savings fund for repairs
  • $100 – Entertainment (including outings and services like Netflix or cable)
  • $100 – Clothing and Personal Care (clothing for 4, haircuts, makeup)
  • $400 – Food and Dining Out
  • $100 – Travel (savings or day trips)
  • $200 – Hobbies or Allowances (for kid or adult allowances)– $50/per adult, $50/child for activities
  • $50 – Holiday/Birthdays (goes into holiday savings account)
  • $50 – Misc.

Total: $3,000 Expenses

Now that we’ve covered the basics of budgeting, I want to know what you’d like to know more about in the future. Share with me in the comments!

Kelly

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Published February 11, 2014 by:

Kelly Whalen

Kelly Whalen is the author of The Centsible Life, a website she started her blog 5 years ago to help her family dig their way out of debt. The site has become a resource for readers, and Kelly has become a well-known mom blogger and a respected voice in the personal finance realm.

When she’s not packing lunches or helping with homework for her 4 kids she’s busy talking money and motherhood on Twitter and Facebook.

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