The big question I get asked all the time, is “how do I set up a budget?” Then this question is usually followed by their particular situation like, “how do I set up a budget when I don’t have any money” or “how do I set up a budget when we’re living paycheck-to-paycheck?”
Now, I don’t believe in the “one-size-fits-all” approach to most things but there is one thing that I do believe it applies to and that is to setting up a budget.
Budgeting For Annual Expenses
Every month, we have the usual bills: rent/mortgage, utilities, and so-on, but there are many annual expenses that can come up expectantly. For example, regular car maintenance such as oil changes or tires. Since these types of expenses are not regular bills, you may find yourself tempted to put the expense on a credit card or take the money from your emergency savings (or maybe even take out a loan). The ultimate goal should be to accumulate enough money in designated accounts or funds throughout the year in preparation of the needs that will eventually happen.
The first thing to-do is to analyze your family’s yearly expenses, not just the monthly ones. In analyzing your yearly expenses you are going to determine what accounts or funds you need to establish. An example of an account is a medical account to pay for co- pays, prescriptions, or insurance deductibles. Other examples are vacation, auto expenses, home, gifts, and clothing.
These accounts or funds can be set up in one of two ways, depending on the type of personality you have. If you are of the personality that out-of-sight, out-of-mind works best for you to keep your spending under control, then setting up different savings or checking accounts with your bank may be best (this is personally our current system). If you have a stronger hold on your spending then you can simply leave the money in your checking account and designate the money to the funds on paper (I used this one for years before I had a joint account).
You can estimate about how much you need in a year by examining the previous year’s checking account register, bank statements or your credit card statements to find out how much money you spent in each category. Below is an example of some typical yearly expenses:
Medical Expenses $1,500/year
Car Maintenance $1,200/year
Home (Maintenance, décor, etc.) $1,300/year
Gas (Winter heating costs) $1,000/year
Special Occasions (Parties, Food, Craft Supplies) $800/year
After you have determined your yearly expenses, the next step is to divide those estimates by the number of pay periods you have in a year. For example, if you are paid monthly, then you will need to divide the yearly amount by 12.
For bi- monthly pay periods, you will divide the number by 24. For two week pay periods, you will divide by 26 and for weekly pay periods, you will divide by 52. Below is an example of what bi- monthly pay periods should look similar to (*Please note that I’ve rounded the monthly numbers where applicable):
After you have determined what your monthly budget for these categories should be, you are ready to create an account or fund to start putting that money aside. For each yearly expense on your Annual Expenses Worksheet, you will need to print an Account/Fund Worksheet. After your next paycheck, you will deduct the amount designated for each account.
For example if you are paid bi-monthly and you have Car Maintenance designated to receive $50 a month, then each paycheck you will deduct $25 from it. You will then apply this $25 to your Car Maintenance account/fund.
The ultimate goal to using budget categories is to have enough funds available for those categories that you will not need to use your savings account or credit cards. This system will help you set aside money that will start to grow with each paycheck. It is the first step to making your money work for you.
If you decide to use the method where you keep all the money in your checking account instead of having separate checking or savings accounts, you will need to remember to deduct the money from both your checking account register and the fund expense page. After you deduct the money from your fund expense page you will need to then add that expense back into your checking account register.
Setting Up a Monthly Budget
Many people shy away from writing down a budget. Most people will make a budget in their head, but fail to write it down. Writing down your budget will help to hold you more accountable for sticking to your budget. If you need help or have never created a budget before, below are instructions for setting one up.
Total Income: You will need to first determine your total monthly income. If you receive a regular pay check, determining your income is as easy as tallying up your pay check totals for the previous month.
If you receive irregular income, determining your monthly income amount will be slightly more challenging. You will need to work backwards in terms of your budget. You will actually need to figure out your total expenses for the month before determining what your monthly income will need to be.
Total Expenses: The next step is to determine your monthly expenses. This will be the hardest step. Most people are afraid of knowing just how much money they spend every month. Even if finding out how close to or in the red you are, determining where your money goes every month is beneficial in creating a budget that works.
Gather up all your regular monthly bills such as mortgage payments, insurance, and car payments. You will average out your non-fixed payment accounts, such as utilities, by taking the average payment from the last three month’s bill statements. How you do this is by adding up all three statement totals and then dividing by three.
Determining Everyday Expenses
After you have determined your regular monthly expenses, you will need to determine your everyday expenses. These expenses are things like, groceries, dining out, and any miscellaneous spending.
Start by trying to determine which ones are grocery related, as that’s typically the next biggest expense. Looking over the previous month’s bank statements, find the ones that are for groceries. As you find these transactions, cross them off in order for you to better keep up with what you have calculated and have not calculated. After you determine how much you spent on groceries last month, determine how much you spent on fuel/transportation. After you have your grocery & fuel expenses determined look through the remaining expenses.
What are the remaining expenses from your bank statements for? Are they for dining out, entertainment, clothing, car repairs, or miscellaneous?
Difference: The difference category is the difference between your budgeted amount and the actual amount that you spent. The goal in the difference column is to either be at zero or in the positive. Any additional amount in the difference column should be added to your savings or to one of your funds to avoid struggling to pay unexpected bills. Another option would be to apply the additional overage to any debts you may have. This is how you create a zero balance budget.
If the amount in your difference column is negative, you may have to dip into your savings account to pay for the expense. In order to try and avoid this negative balance in the future, you will need to examine the expense to see if there was a way to avoid the overage. Was it a simple mathematically error? Were there other components of the expense not factored in originally, such as taxes, fees, or interest? You will want to make note of these factors in order to account for them in next month’s budget.
The difference column is the most important column on your budget worksheet, as it gives insight into how you spend your money every month.
Cutting Your Expenses
After calculating your monthly budget, you may be surprised by the amount of money you spend every month. You may be asking yourself if there is a way to squeeze more money into your budget. Possibly. These are a few of the options that may help to generate more positive than negative balances in your budget:
Entertainment: This category of expense should be the first one to go if you are in the red. Budgeting does not mean that you cannot live an enjoyable life. It simply means that you are aware of where your money is going. Knowing where your money ends up every month will ensure that you have more money later to have fun with.
Entertainment expenses are things like, cable, internet, data on your smartphone, going to the movies, dining out, or attending sporting events. A few questions to ask yourself when determining if you can reduce your expenses in the entertainment category are:
How much is this costing me every month? How much a year?
Is this something I could live without for a few months?
Is it worth it to me to live without this in order to save ______ dollars a month/year?
Depending on your answers to the above questions will determine how committed you are to reducing your expenses. If you need the internet or data phone plan for work, then cutting those expenses would not make sense. However, if you are a stay at home mom cutting out the data plan on your phone may be worth it, especially if you have the internet at home. Or switching to a more affordable phone provider like Republic Wireless (who we use) may be a worthwhile option.
Miscellaneous: Another typically large area of expenditures is the miscellaneous spending. These transactions are the random ones that are made without us even giving them a second thought. An example of this type of transaction is walking into a gas station to pay for gas but walking out purchasing a Slim Jim and a Red Bull in addition to gas. In order to stop these impulse expenses, you will need to make a conscious effort to stop the impulse when it inevitably creeps up.
No Spend Month: A No Spend Month is a month of no incidental spending. You will still pay your bills and purchase groceries and gas for your car. However, you will not spend any money outside those three categories. This is an eye-opening experience and one that every household should try. This will be the fastest way to add more money back to your budget.
Sell Your Used Items: If you need to generate more income in order to balance your budget, one of the easiest ways to do this is to sell any items in your home you do not use or need. Start by sorting through your closets, storage places, and garage. Look for anything that you haven’t used in years or anything that is no longer applicable to your life. For instance, if you are no longer expecting to have more children, baby clothes are no use to you. You can sell your children’s used baby clothes by lots on eBay, Craigslist, yard sale sites on Facebook, or in a garage sale.
Sticking to Your Budget
Once you have a written budget in place, the most challenging part comes. This is where you actually have to stick to the budget you created. There is unfortunately no fool-proof system to sticking to a budget. It requires an insane amount of discipline to stay on track.
There are, however, a few ways that can make sticking to your newly created budget easier. Start implementing these ideas into your daily life to help you succeed in your money management.
Never Shop without a Shopping List: Similar to how you would never grocery shop without a grocery list, never do any shopping without a list. If you are online shopping, create a list of the items that you are looking to purchase. If you are clothes shopping, create a list of the items or types of clothing you are in need of.
Leave The Cards At Home: Instead of shopping with your credit or debit cards, bring only cash with you. In general, people tend to spend less cash than they do plastic because they can actually feel the money leaving their wallets. Credit cards typically carry a higher credit limit than your checking account balance, making it tempting to spend money you do not have the cash to pay for.
Accountability Partner: An accountability partner is someone who will help you keep your commitments. This person should be someone you trust enough to discuss your financial matters with. This person could be your best friend, sibling, parent, or partner. Check in with this person once a week to update them on how you are doing financially. Contact this person any time you find yourself with the urge to spend money you do not have.
Invest in a Money Minute: Every morning or right before going to bed, have a money minute. This is a sixty-second window in your day that you spend looking over your money. You balance out the day’s transactions, check off bills that have been paid, and prepare the coming day’s financial events. Performing this simple task every day will ensure that you have explicit knowledge of where your money is.
Key Points to Remember:
Everyone in your family should be involved in the budget process. If you share money with someone but are the finance manager, you need to make sure that you include the other person. Budgeting for a family is a family affair and decisions should be made together.
Do not be tempted to purchase an item that you do not have the funds for. If you have the funds in your medical account do not dip into that account to purchase a non- medical item. You will regret it later. Be patient and be willing to wait until you have the funds available to make a purchase.
Write down whatever your financial goals are. Big or small, write them down. Post the goals somewhere where you will see them every day to remind you and your family what you are working towards.
Give yourself grace. Living life by a budget is not easy. We all have wants and needs and sometimes it can be difficult to differentiate between the two. It is okay to fall off the wagon. Forgive yourself and move on. Tomorrow is another day.
Grab the workbook and start building a budget that works today!