A budget is the cornerstone of an good financial plan. It's truly amazes me how intimidated people are of budgets. Hopefully after reading this you will understand how to create and use a budget without fear. The most difficult part of a budget is facing yourself after you see how much money you are wasting.
What Do I Need To Start A Budget
If your married or in a relationship where you share bills and money you need to grab your partner. If both of you are not on board with this budget it will fail and you will blain the budget. Once you have your partner you need to gather all the financial information. Grab all your bills such as: House Payment, Car Payment, Car Insurance, Electricity, Water, you get the point. You may not have all the information for every expense such as food, most people buy food with cash and credit card and throw away the recipes so don't get too hung up on the numbers just estimate. Before I get to far into this I want to mention that you will be reworking your budget over the next 3 months. The first month is hardly accurate. So don't let this discourage you, by the third moth you will have very accurate numbers.
Doing The Budget
I use Microsoft Excel to do my budget because it does the addition and division for me, however it isn't necessary you can handwrite a budget on a single sheet of paper.
I like to start off with the income, add up all the household income for the month. If your income fluctuates you will need to average it out. Doing the income portion is easy for most. For this article were going to assume your income is $4000 per month. Now the goal obviously is to spend less than $4000.
The next step is to break up the expenses into 5 categories: Home, Car, Entertainment, Food / Household, Other / Loans. You can create as many or as few categories as you want, I happen to find that these 5 categories cover all my needs. The main reason I use categories is to quickly see where my money is allocated and what percent of my income is going towards those expenses.
I then begin entering expenses under the proper category. For example expenses such as House Payment, Water, Gas, Electricity, Trash, and Cell Phones all go under the Home category. Below is a demo of a budget. The first box is the overview of each category, it allows us to see that 42% of our income is spent in the Home category while only 3% is spent on Entertainment. The following boxes are itemized expenses for each category.
| | All | Cost | % Of Income |
| | Home | $1,690.00 | 42.25% |
| | Car | $880.00 | 22.00% |
| | Entertainment | $125.00 | 3.13% |
| | Food / Household | $830.00 | 20.75% |
| | Other / Loans | $200.00 | 5.00% |
| | Total | $3,725.00 | 93.13% |
| | Save | $275.00 | 6.88% |
| | | | |
| | | | |
| | Home | Cost | % Of Income |
| | House Payment | $1,400.00 | 35.00% |
| | Water | $65.00 | 1.63% |
| | Gas | $65.00 | 1.63% |
| | Electricity | $65.00 | 1.63% |
| | Trash | $20.00 | 0.50% |
| | Cell Phones | $75.00 | 1.88% |
| | Total | $1,690.00 | 42.25% |
| | | | |
| | Car | Cost | % Of Income |
| | Car Payment | $400.00 | 10.00% |
| | Car Insurance | $105.00 | 2.63% |
| | Gas | $350.00 | 8.75% |
| | Maintenance | $25.00 | 0.63% |
| | Total | $880.00 | 22.00% |
| | | | |
| | Entertainment | Cost | % Of Income |
| | TV / Internet | $110.00 | 2.75% |
| | SIRIS Radio | $15.00 | 0.38% |
| | Total | $125.00 | 3.13% |
| | | | |
| | Food / Household | Cost | % Of Income |
| | Groceries | $450.00 | 11.25% |
| | Eating Out | $100.00 | 2.50% |
| | Cleaning Supplies | $50.00 | 1.25% |
| | Baby Stuff | $150.00 | 3.75% |
| | Toiletries | $80.00 | 2.00% |
| | Total | $830.00 | 20.75% |
| | | | |
| | Other / Loans | Cost | % Of Income |
| | School Loan | $200.00 | 5.00% |
| | Total | $200.00 | 5.00% |
Understanding The Budget
Once you complete the budget you can begin looking at the expenses and really start to get an Idea of where your money is going. Now on my budget I also have each expense displayed as a percent of my income("% Of Income") because looking at my expenses as a percentage of my income really helps me understand how much something is costing me. If I simply said "I spend $1400 a month on my house payment" what would that tell you? It doesn't tell you much, if I make $2500 a month I am overspending but if I make $4000 a month then I'm doing fine.
Following Through With Your Budget
This is the part that most people have issues with. Once you create a budget you need to try your best to stick with it. As I mentioned prior, the first 3 months of budgeting will be difficult your budget is going to change a few times and that's ok. After that time passes your buying habits will have change for the better and you will have a good understanding of how much things cost.
It's important that you stick with the budget and stay focused. You may find it difficult to spend the money as you allocated it in your budget. There is a trick that can help you spend the budgeted amount, I will go over it later on. But first let's explore where in your budget you will most likely go over. The expenses that fluctuate are most difficult to budget and they are usually based on your habits and behaviors. For most people I find that Entertainment, Groceries, and Eating are the expenses they have a problem with. You probably already know that these expenses were the difficult ones.
The simple way to control these expenses is to first create a budget that is realistic. Don't make a budget that you know you won't follow. Won't is underlined because most likely the numbers will work but you know you won't follow it. You can gradually drop expenses. It's ok to make the transition over time. The worst thing you can do is to stop all your hobbies, cancel cable TV, buy half as much groceries, and say at home every day to save gas. Some people can make that work and others may need to, but most people can simply do it gradually. So unless you are living way above your means make the change over time not overnight.
The second way to control these expenses is to put the money for each item in a separate envelop. Label the envelope for the item and don't spend it for anything else. Trust me it works. If you want to take your spouse out to a nice dinner you will walk over to your "Eating Out" envelope and pull the needed cash. The main thing this approach does for you is it make you be very deliberate with your money. You will think about the purchase before making it, unlike now when your buddies at work say "Hey let's grab lunch today". Instead of tagging along you will stay and eat the lunch that you brought and after work you will take your spouse out to a nice dinner.
The third thing to do is to use cash for these expenses. Yes I understand that you will have to think about your expenses before leaving the house and grab the needed amount of cash. That is exactly the point of using cash. You will know when you are spending money unlike swiping your card without even giving it a second thought.
All of the techniques mentioned above are designed to change your behavior and thought process about the expenses. All too often we spend money without giving it a thought. You really must understand that each dollar is a vote and with it your voting on what's important in your life. So before you spend $10 a day on Starbucks coffee and a Danish think about what else you could be doing with $50 a week.
Need More Help
If you need any help at all with a budget please shoot us an email at MoneyBasic@gmail.com we will be glad to help out. We can even help design a nice Excel budget for you that works. So if you have any questions or need any help just let us know.
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