So you are convinced that it is a good idea to make a budget, right? Right!
But how do you start?
Let’s start with the easy part- income. Most people have a fairly steady income and should know how much money is coming in. If you have a variable income, you need to treat it like you treat your spending- use your best guess based on history/upcoming income that you know about, and be conservative. Update it as you learn more.
After you know how much money hits your bank each month, start by getting an idea of where your money is going now. A baseline, if you will. It will probably take a few months for you to get a full picture of your expenses, but don’t let perfection get in the way of planning. Estimate now and then you can adjust as you go. When I got my first job out of grad school, for the first four months my clothes spending was triple what it is now because I needed a full professional wardrobe. Now that I have the staples, I’ve adjusted my budget to reflect my lowered spending and my lowered need for clothes (did I really just say that?! There is no such thing as a lowered need for clothes!)
There are a few ways to go about tracking your spending. While working on this part of your finances, I would recommend relying on debit or credit cards (but don’t use this as an excuse to overspend!) just so that you don’t make yourself crazy trying to figure out where your cash went (or, if you are a diehard cash user….save those receipts!) When it comes to actually following a budget once the amounts have been set there are ways to use cash only and still stay on track- I’ll cover that later.
Method 1: The Worksheet Method
Make your own spreadsheet and fill in your expenses. Pros: You can adjust it to fit your lifestyle. This is good if you have complicated finances or if you mainly use cash, because you will have to manually enter your expenses anyway. Also, you can keep it supersecure by saving it only to your computer. Cons: Pain in the butt. High maintenance, and you really have to be committed. If you suspect this will be too much work for you, don’t do it. Make it easy on yourself to stick to a budget!
Method 2: The Automated Method
Use a personal finance tracking software. I use Mint.com, which is very secure (and pretty awesome), but there are other options out there. Mint works by linking all of your accounts into one website so you can look at your spending, your budgets, your savings goals and your investments all in one place. NICE. Mint automatically uploads your spending and files each purchase into your budget tracker, so you can see how you are doing for each category. Mint also tracks long term trends in spending. It’s pretty great. And there’s an app.
Worried about security? Mint is just as secure as online banking. But more awesome because everything you need is in one place.
Ok, now you know where your money is going. Next, set your budget!
First you need to make a list of the main expenses that come up regularly in your life. Here are examples from my own budget:
- Public Transportation
- Emergency fund
- Retirement investments
Next, set target amounts of what you want to spend in each category based on how much you normally spend. Be realistic- don’t worry about “trimming the fat” just yet. If you usually spend $250 on groceries, don’t suddenly expect your spending to drop to $100 just because you wrote it in the budget. Some items won’t come up every month- I don’t travel every month, but I plan to fly every three to four months, and that is in my budget.
Now, add it up. Is your budget less than your income? Awesome! Book your flight to Vegas, baby! (Or, keep reading this blog so you can learn about some good long term plans for that spare ca$h).
Is your budget more than your income? Still awesome, because now you know where your money is going, and you can make a plan to tweak your spending so that you are living within your means. You are becoming empowered to take charge of your financial life, and that is something to be proud of.