And now that you're all caught up and we're on the same page, let's get going with Part 2!
I talked last week about how important budgeting is and the reasons that we've committed to it. But of course if you've never created a budget or this is a new concept, it can seem overwhelming. So today, I'm happy to be sharing what I feel like are the top 5 steps to creating a budget. (I'm seeing a little Top 5 pattern going on here, which I definitely did not plan...)
1. Determine how much money you actually make.
This seems self explanatory - the size of your budget is constrained by your income. But it seems pretty easy to over-estimate the amount of money you make. When I first started thinking about budgeting, I thought this was totally simple. My salary is printed clearly on my appointment letter with my job. And so in my head, that's just how much money I made. And it is, but only kind of. In real life, once taxes and things of the like are deducted, my net salary is the number I need to be paying attention to. Whether you're salaried, hourly, or living off of a stipend or allowance, it's important to figure out what part of your income is actually disposable.
2. Figure out how much you currently spend.
This is another one that seems simple, but requires some bookkeeping. Save your receipts! This is a good habit to get into to maintain and be sure to stick to your budget, but it's also necessary when creating your budget. How will you know how much to allocate for groceries if you don't know how much you currently spend?
I recommend keeping tabs on all your purchases and dividing them up into categories that most make sense (groceries, transportation, entertainment, utilities, etc.). Figure out what you spend in each category each week. We do our budget monthly and so knowing how our expenses vary each week helped us determine how much we should be spending per month.
3. Adjust things based on your income and future needs.
Once you've figured out how much you spend versus how much you make, it's time to make adjustments. First and foremost, it's important to be sure that you are not spending more than you make. Second, determine how much of your income you are able to save each month. Is it more or less than you'd like? What are your future goals? Are you saving enough to meet them? Where can you cut expenses?
I'd recommend setting aside a separate part of the budget that can be used for one-time purchases, or other miscellaneous things like birthday gifts, rainy day fund, etc.
It will be up to you to decide exactly which and how many categories you have in your budget, but at minimum, you should have categories to meet your basic needs - food, shelter, transportation, and ideally, you'll be able to start putting money away in a savings category to be used in the future.
4. Make sure every dollar has a name.
I don't know where I heard this. I'm sure it came from some financial expert, but the idea is that every dollar has a purpose. The dollar might be for groceries, or for savings, or for going out, but it has a purpose. No dollar is just for decoration. Having a budget enables you to know what every dollar is being used for, which is helpful in keeping track of things.
5. Find a system that helps you easily track your budget.
Once you've set up your budget, it's important to find a system that will help you easily keep track of your budget. You're busy, I know. You've got a lot going on and you're not an accountant by day. So, you'll want to make the budgeting process as simple as possible once you've got it set up. We use Quicken to keep track of our budget and are huge fans. It syncs with all of our credit, bank, investing, mortgage, etc. accounts and updates each accordingly. We can easily reconcile the data in Quicken with monthly statements, and create our own personal categories based on our budget.
But of course Quicken is not the only program out there. I know lots of people use Mint.com to keep track of things and it also categorizes things and is able to sync with your accounts. Mint is also free, which is super helpful if you are just starting to budget.
You can also use Excel to create a free budget spreadsheet and if you are pretty savvy with it, there are all sorts of formulas you can create that will calculate the budget pretty easily. The big drawback here, it seems is having to manually enter your expenses.
And last but not least, you can always use the old pen and paper method. In my humble opinion, this just takes so long and I would lose the budget way to easily, much less forget to record everything, so it's not for me. But, if it helps you do your thing, go for it.
And that's what I've got. I'll say it again, just to be clear: I do not consider myself to be a financial expert. I just enjoy learning about financial things and I feel strongly about being good stewards of our resources and budgeting plays a big part in that. That said, I am happy to hear your thoughts and experiences with budgeting or to hear if you have any additional tips you would like to share. Feel free to post your thoughts in the comments section, or to send me an email directly via the contact page at the top of the blog.
Happy budgeting, friends!