Photo by Ina
Yankee Bill and I have never really been into using a budget. With our frugal habits, we found that we saved money in so many areas that typically we could be very casual about our finances and do fine. We had a general idea of what came in and went out regularly and a nice enough cushion that we could play it by ear.
Recently things have changed. The rise in prices of just about everything in the last two years coupled with Yankee Bill switching careers to something more personally and professionally fulfilling but slightly lower paying has led to a realization.
It’s time. Time to get a firm handle on our finances.
So we are creating a budget. We don’t want to, and we’ve been kind of dragging our heels, but we are going to do it. Actually, creating a budget really isn’t that difficult~it’s the sticking to it that can be hard!
5 Simple Steps to Create a Budget
Step 1: How much money is coming in?
The best place to start is to figure out what money is coming in. We will consider things like:
Salary
Alimony/Child Support
Social Security
Retirement Income
Disability Payments
Step 2: How much money is going out in regular, defined payments?
Next we need to figure out how much money is going out-but rather than jumping in and trying to decide how much is “allowed” for fun money, or what the grocery budget it, we’ll start with the things that we know are set in stone. Things that we can count on~the mortgage for example. Then we’ll add in the ones that we can make a pretty realistic guess for, based on past experience, like utilities. Some common examples of these “defined” expenses are:
Mortgage/Rent
Taxes
Utilities
Car Payments
Loan Payments
Health Insurance
Car/Vehicle Insurance
Home Owners or Renters Insurance
Alimony/Child Support
Daycare/After School Care
Tithe
Retirement Savings/Investments
College Savings
Cell Phone Plan
Memberships (Gym etc)
Cable
Internet
Tada! That’s the easiest part done!
Step 3: How much money do we spend on variable expenses
Next is the slippery stuff-the expenses that change depending on the month, the situtation and your willpower.
Before we start talking numbers, we will just list out every other expwnse category we can think of to make sure we have them all.
Here are the most typical examples that I’ve thought of.
Toiletries/Cleaners & Paper goods
Gas
Vehicle Maintenance
Medical Co-pays etc
Entertainment
Clothing
Gifts
Office supplies
Classes or Memberships (dance classes, gym memberships)
Charitable Giving
School Supplies
Gardening/Landscaping
Home Maintenance and Repair
Pet Care
Savings
Credit Card Debt
(Of course this list will be different for every person, depending on lifestyle and individual priorities.)
Them it’s time to assign amounts to the variable expenses. I think we will start by estimate what we are realistically currently spending. Once we’ve got it all listed out, we’ll take a deep breath and add it up and see how far “off” the expenses are from the income.
Then we’ll “get real” and cut back on the various categories until Expenses and Incomes balance out.
The key to the entire process of creating a budget is to be realistic. Unrealistic goals will lead to failure.
Just as an example. . .If you have a family of 5, $30 isn’t likely to make it as a monthly grocery budget. Someone who works late 3X a week and doesn’t know how to cook allocating $0 for takeout is probably a bad initial goal. On the other hand, if like me you already have a closet full of clothes, then not spending any money on your wardrobe for a few months is very reasonable.
Step 5: Review and adjust the budget.
After the first month we will review our budgeted expenses against the actual expenses. Where did they fail to match up? Did we forget a category or severely underestimate our variable expenses? Was the failure due to unrealistic goals or loose spending? Can we rearrange the money from categories within the budget, or do you need to cut down on our spending somewhere else?
The initial budget may need to be adjusted monthly for a few months until all the kinks get worked out!
There you have it, our easy plan to create our very own budget. We’ll be going through these steps very soon!
So, how many of you have a budget? How did you create yours?
I’m attempting the budget thing too. I bought & installed Quicken Cash Manager the first of the year to track my income & spending – because both my income and my spending vary drastically from week to week and season to season I decided to monitor for several months to get a good feel for what’s happening before I get too deep into the actual budgeting part.
A friend of mine has been using the envelop system very successfully for years and I’ve always admired her ways with money but being that I never carry a purse and I hate to have cash around the envelop thing wouldn’t work well for me.
I’m fortunate enough to live in an area that has a online grocery order service. That’s been huge for me for both saving on groceries and for meal planning. It does a running total as I add things to my online cart so I know when I’m close to going over my planned spending and can adjust my order. So far it’s the only place I’ve noticeably had any improvement in spending so far.
Are you planning to do a monthly update on how you’re doing with your budget? Challenges you’ve found, methods you’re using, etc.?
Hi Jenn,
I have set a budget, it got thrown to the wind about Christmas time and I have not reset it, because our household will be undergoing changes, my M-I-L is moving back to her home after living here for 7 months. So I will be amending the budget for groceries, misc expenses and see where my utilities will come down between 10-20%. I use the envelope system and as long as we (hubby and I) follow it we are okay. I utilize the quiken system at work, to budget for the individuals I work with, very simple and easy program, and is quick to use when tallying receipts for expenses.
I am looking forward to reading your tips and techniques that work well for you!
Heather
We’re self employed, so a budget is vital or we pay for it later! I love our budget, but I’m an accomplished listmaker and the power of a list or budget makes me feel free.
I budget on paper since we stick to it better that way. No excuses that we lost the budget to a computer crash or similar 🙂 We come up with a yearly guide budget similar to how you did in this post. I use the yearly guideline budget to then come up with a monthly budget, which I record in my monthly planner. Having bills, fun money and other expenses laid out in my planner ensures I see it everyday and makes me more likely to stick to it.
I also record every single one of our expenses every day, and I have for five or so years. I tally up the categories each month and use those to decide if our budget needs any tweaks month to month. Some people think it’s a hassle (my husband), but for a Type A personality who loves lists like me it’s actually quite enjoyable and empowering.
What a great list. We do not have a budget, but I can definitely see the benefits to having one. The closest we came is throwing some lotto winnings into an envelope marked, “Freedom Fund.” 🙂
Melissa-There is just something intimidating about starting a budget-we feel like we won’t be able to spend what we want. . . but if we can’t afford to spend what we want then we are just fooling ourselves anyway, aren’t we? (ps-that’s directed more at myself than you!)
My wife and I have come to the conclusion that our budgeting system just wasn’t working well enough. It wasn’t detailed enough, and we weren’t working as a team. So, we’re in the middle of completely overhauling how we handle our finances. Hopefully we’ll come out with a much better plan…
Our budget has been a lifesaver! I get paid twice a month like clockwork but hubby’s income varies drastically. So, we budgeted ourselves to live off just my income, which frees up his income for savings and debt repayment. I run our budget on a simple Excel spreadsheet, which is set up to work like a check register. At the top, our income, which is followed by the list of fairly predictable expenses so that I can see how much we have left over at the bottom of the spreadsheet. I do the same spreadsheet every month so I can adjust it as necessary.
One other helpful thing we do is put all of our flexible expenses (gas, groceries, etc.) on our credit card. Sounds counter-productive but it works. We budget a certain amount each month for the credit card bill and always make sure that we come in under the amount owed so that we pay the card off every month. This makes it much easier for me (the family finance manager) to avoid bouncing checks or running out of cash. After a few months of this, we know that our monthly credit card bill will be between $1200-$1800. So we budget for $1800 and if the bill comes in under that, we put the “extra” into savings.
Heather-that’s an interesting take on budgeting! I can see how well that would work-especially if one is disciplined with their card. However a lot of folks have a hard time keeping that under control.
Jenn,
A very nice article about budgeting. We have been “in training” with my sister and have identified areas of improvenment through writing down every penny spent.
It is actually easier than it sounds and provides freedom from the stress of overspending. Looking forward to future posts.
Karen-I’m so glad that you enjoyed the post, and that you are getting your financial house in order. It really does take a stress out of life, doesn’t it?