Without a doubt the last 18 months have been tough for many people in terms of their financial situation. Personally, my wife and I have seen our investment protfolio lose a large chunk of its value and have felt the sting of see-sawing fuel prices and steady rise in food prices. Fortunately, we have not experienced a job loss.
My wife and I have long known the positives of creating a budget. We went through Dave Ramsey’s Financial Peace University back in 2005 when we were engaged. My in-laws, seeing the wisdom of getting us off on firm financial footing, paid to put us through the class. Anyone who knows anything about Dave Ramsey knows that he is a huge proponent of budgeting. So why did we wait so long to do a budget “on paper, on purpose?” That’s mostly my fault, my thinking was if all the bills were getting paid and we were coming out in the black every month than we were doing fine. Well, my wife and I recently decided that it was time to put some more structure into our financial life and take control of our money.
The thought of creating a budget can seem intimidating at first. Expenses change from month to month and sometimes trying to figure up an average monthly budget for something like groceries or gifts can be daunting. I will spell out how we set up our budget and maybe if you are on the fence about taking the budgeting plunge, it will help you get started.
1. Figure up your average monthly (take home) income. If it varies a bit, I would err on the low side.
2. Now that you have figured out your average monthly income, you need to get ready to start subtracting your expenses until you have spent every dollar of your income on paper.
3. My wife and I have used Quicken to track our expenses for years. Quicken allows you to see an average of what you are spending in a particular category. For example, our twelve month average for groceries is $288/month. Using that number as a base, we decided to budget $300/month for groceries. If you do not have Quicken (I highly reccomend it) you will have to figure out your averages using some other method (i.e. keep a spreadsheet for a few months that tracks your monthly expenses in the categories you want to budget).
4. Budget your essentials first. This is especially important if you are on a tight income and have trouble making ends meet each month. Budget your food, clothing, shelter (rent/mortgage, power, water, gas, etc.), and transportation first. Once you have those worked out you can take what it left and spread it out among the rest of your expenses.
5. Budget to pay down debt. If you have car payments or are carrying a balance on credit cards, build your budget so that you are paying extra on those debts. Think of it like this: you have a $300/month car payment and you budget $400/month to pay towards the car payment. That means you will pay off your car more quickly AND once the car is paid off you have $400/month that you can redistribute to other categories in your budget.
6. Be detailed. The budget heading “entertainment” is incredibly broad. Break that down into subcategories (i.e. books, theatre, DVDs, video games) and set an amount for each subcategory. Being this specific helps keep you honest and build discipline. It keeps you from blowing your entire entertainment budget on a boxset of DVDs and all the sudden your wife doesn’t have any money left in the entertainment budget to go watch the movie she had been looking forward to for months.
7. Create a discretionary category. My wife and I each have a little bit of money each month that we can do with whatever we want. Sometimes, if we use all our “eating out” budget, we will use our discretionary category so that we can go have dinner with friends.
8. Decide which budget categories you want to roll over each month. Our grocery budget is static, it is $300/month and any extra does not roll over. The items under the entertainment category are not static and the remaining balance rolls over into the next month. This allows us to save up money in a particular category for a larger purchase than is budgeted for in a single month.
9. Budget saving/investing. Don’t forget to include this in your budget expenses. Even though the money is still yours, it takes a piece out of the income pie and if you don’t budget for it you will find it is much harder to save/invest in a regular and disciplined manner.
10. Don’t fret if your budget is not perfect. Every month will have some unforeseen events that you never thought to create a category for. That is where the disciplined saving plan comes in. If your car dieands needs an expensive repair that is far beyond the amount you budget for auto maintenance each month, you won’t have to worry because you have been saving systematically and have enough money to cover emergency expenses like a major car repair.
These are just some suggestions that we have found helpful in our budgeting plunge. You will be amazed at how much it helps you to communicate with your spouse about money issues when you have a budget to help keep both of you accountable. If you are like many people, the thought of creating a budget is intimidating and you are not really sure where to start. We had the same problem until we discovered a website of incredibly helpful Excel spreadsheets with very detailed budgets. That is what we are currently using to keep track of our budget, and I think it would make a good starting point for most people.
Here is the spredsheet we use. We do a new one each month and save it after we make any changes:
Finally, if you have an Ipod Touch or Iphone, I recommend the Spend app. My wife and I have it on our Ipods. We didn’t put our whole budget on it, but we did put certain categories like “groceries” and “eating out” so that we can take our budget with us wherever we go.
If you have been on the fence about budgeting, give it a try. You will be amazed at how much easier it makes managing your finances. Yes, it requires some work and discipline, but most good things do, and trust me, this is a good thing in these challenging financial times.