Do I really need a budget?
I used to believe that I didn’t need a budget. I thought the only people that needed budgets were those who had more money than I did. I had so little, that I kept track of every penny I found on the sidewalk! So why did I need a budget?
When you have a budget, you take charge of your money. If you don’t have a lot of money — or if you have more than you know what to do with — you need to be the one in charge of it. In fact, those with lower incomes need a plan more than the ones with higher incomes. Higher incomes can absorb mistakes better than lower. The less money you have, the more you need a budget!!
What is a budget?
A budget is a plan for your money. Specifically, you list all the sources of your money, and all the things your money needs to pay for in order for you to live the way you want to. It gives you a picture of whether or not the money you have coming in matches the money you have going out. If you have more being spent than earned — you have a problem! But you won’t know where the problem is unless you have a budget.
How do you set up a budget?
First, track your money. For about a month — maybe even 3 months — track every penny that goes through your hands. Write down everything you make, and where it came from: your paycheck, any government benefits you may get, any support payments you may receive, gifts and loans you get, even money you find. Then write down everything you spend. Asking for and keeping receipts may help with that. Write it down no matter how you actually spend it, whether using a debit card or credit card, writing a check or paying with cash. You can’t make a plan unless you know exactly what you’re doing.
Second, gather all the papers related to your money. Paystubs and tax returns, benefit and support statements, and all the receipts and bills need to be in this stack. You may want to sort them into money in and money out stacks, for easier use.
Third, it’s time to start creating your plan. Use your money-in stack to average out what your income is every month. Most of us get a fairly regular income, unless of course, you’re self-employed like me. If your income varies from month to month like mine, take an average of the last 3 or 6 months worth of income and use that.
It’s the expenses side of a budget that usually drags most of us down. It seems complicated right? It really isn’t. Expenses are divided into two types — with further subtypes in each category. First, you have fixed expenses. These are things that are the same, or mostly the same every month. Fixed expenses include things like housing costs, utilities and insurance. The second type of expenses are the variable ones. These are the ones that change every month, or may not even apply every month. Variable expenses include things like groceries, gifts, clothing, and entertainment.
You can figure out your fixed expenses pretty easily. After all, you get bills for those every month. Housing payments include your mortgage or rent payment, your property tax if applies, and housing or tenant insurance. Utilities are things like your power bill, water bill, heating bill, and garbage, if that applies. You may have a car payment and car insurance, or you may have a transit pass you buy every month. They are fixed expenses as well. And don’t forget things like health insurance, life insurance, or disability insurance, if you have them.
Most people get frustrated when it comes time to figure out your variable expenses. Do you go by percentages and see if that fits your lifestyle? Do you just guess? This is where all that tracking of your spending will come in handy. If you kept your receipts or a record of your spending, then you can use that to help set up your budget.
Categories of your variable expenses can be simplified to 4: entertainment, food, personal and gifts. Entertainment covers things like going out to a restaurant to eat, buying a book or magazine, tickets to concerts or movies, and activities like golfing or bowling or swimming. Food covers your groceries, household items and toiletries. Personal is for things like getting your hair or nails done, buying clothes, and medications. And gifts would be all those things you need to get for others in your life — flowers on mother’s day, chocolates at Valentine’s, and of course birthday and Christmas gifts.
Expenses over the year
What do you do about those expenses that don’t happen every month? Valentine’s is only once a year, and most of us don’t shop for Christmas year round (tho experts recommend you do!). Personally, I take the approximate amount that I spend on Christmas gifts (for example) in December, and divide it by 12. That gives me an amount that I need to save every month in order to afford Christmas every year. One way to save it is to buy gift cards in that amount and put them away for December — or just stick the cash in an envelope, or open a Christmas savings account and put money away every month.
Accurate Budget is Important
For your first budget, you’ll want to use as accurate a number as you can. Don’t put down what you think it should be, but what it actually is, using the records and receipts you have. Once you get it all on paper, you may be surprised about where your money is going, and see where you can make changes.
Don’t try to make changes right away. Part of creating a budget that will work for you and your family is just being aware of where the money is — where it’s coming from and where it’s going. As you become aware, you’ll naturally rethink that coffee on the way home, or picking up pizza instead of making dinner one night. Even if you decide to do it, you’ll be making that choice aware of the impact on your budget instead of ignorantly and then wondering where the money went.
How to follow your budget
After you’ve created a budget and tracked your spending and income, you can start making adjustments. Are you accurate in your paychecks or is there a way to increase your income without impacting your family life too much? Are you spending too much on entertainment? Maybe you can make dinner at home instead of ordering pizza every Friday. Make the adjustments carefully. There are reasons you are spending the money where you are, and there are reasons your income is the way it is. Consider carefully before changing those figures.
Put it into Practice
Once you’ve made adjustments, it’s time to put it into practice. One way some keep to a stricter budget is to use a cash-only budget. Some experts suggest that we spend less when we use cash. The envelope system is a classic example of how to budget a cash only budget. Others will open separate bank accounts — one for all the fixed expenses, and one for the variable ones. They set a limit on what goes into the variable expense account every week. Once that money’s gone, there’s no more to spend that week. However you figure out your way to keep to your budget, make sure it fits in with your lifestyle.
Keep track of your money
Setting a budget doesn’t have to be complicated or frustrating. And once you’ve created one, following it can actually make your life simpler. Don’t make this more work than it has to be. Just make sure that every adult in your home is on the same page as you. It all starts with keeping track of your money!
This is so useful and very thorough. Especially the part about variable expenses, which happens to be a tough area for me to budget in. Thank you!
I have not mastered it at all either! It’s soo tough. Thankfully my bank now offers autotracking software so i can see where most of my money goes, at least. Check with your bank and see if they have something that might help too.
Over the years we have begun to keep a detailed spreadsheet. We have one account for only bills–nothing else is to come out of it. Each pay period all the bills are paid. All extra money is divided up between spending and saving. It has been a long road and process to figure out a system that works.
And when you find that system that works, it makes life a lot easier, right?