I’m so happy to have my blogging friend, Alison, as a guest today. She writes over at Tickling the Wheat and has some awesome posts on personal finance and budgeting. She has a very intentional approach to budgeting that actually helps you accomplish your goals. And since part of my 2016:Year of Intention is to be more intentional with our family budget, I thought I’d ask Alison share her method for starting a budget!
When you think about budgeting, do you get a little pit in your stomach? Maybe you know you need to start a budget, but the thought of restricting your spending (no more dining out?!?) fills you with dread. Or, maybe your spending isn’t the problem. Instead, you have an overwhelming amount of bills that you need to pay and your finances are stretched too thin.
Regardless, a budget is the perfect solution for your problems. A budget is simply a way for you to tell your money where to go. It’s a way for you to take control of your finances, both the good and the bad. It doesn’t have to be scary. Most importantly, it should work for you!
How to Start a Budget
If you’re new to budgeting, or even if you have a budget but it’s not working for you, try these three steps to start using a budget.
1. Think about what you want from your budget
Your main goal is to create a plan for your money so that it works for you. Many budgeting experts recommend that your expenses stay within certain percentages, but that may not be realistic for you. For example, the recommended housing percentage is 25% of your income, but if you live in California, you may find yourself spending 35% of your income on your rent or mortgage.
To create a personalized budget, start by asking yourself two questions:
Why are you creating a budget?
Is your main objective to organize and refocus your spending, or do you have a specific purpose, like paying down debt?
What are your goals?
In addition to including your income and expenses in your budget, you’ll also want to include your financial goals. Don’t be afraid to dream big! Think about both short-term and long-term goals, like saving for your upcoming vacation as well as setting up a college savings fund for your newborn.
If you’re married, make sure you include your spouse when you’re brainstorming your budget. Their answers (especially their goals) may surprise you!
2. Review your past expenses
I always base my budget on my previous year’s expenses, as well as my expenses for each month. I then use those expenses to create my new budget.
The simplest way to review your expenses is to use your bank or credit card statements. Many banks provide customized reports, like the graph below, to show where you spend your money. Note that some things you purchase may not be categorized the way you want (my mail order prescriptions are categorized as “retail”), but it’s much easier to change a few things than track every expense.
If you use cash for most of your purchases, tracking your expenses may be a little more difficult. Start by saving your receipts for a month and organize them by category. Try saving them in an accordion folder or a binder. At the end of the month, add the totals from the receipts for each category. Use those category totals as a starting point for your budget.
As you’re reviewing your expenses, take some time to make sure that your spending habits align with your financial goals. For example, last month I went overboard on my dining out budget, so I wasn’t able to save as much in my house fund (oops!). For the next few months, I’ll have to scale back on dining out in order to make up the difference.
Also, look to see if there’s a way to streamline your expenses. Is there anything that surprised you about your spending habits? Is there anything that you want to do differently?
If you and your spouse have different opinions about your budget, you’ll need to work together to streamline your expenses. Maybe he doesn’t want to give up his Tim Horton’s habit, like my husband. If you create mutual goals, it’ll help to explain why you may need to change some habits. Once you’ve tracked your expenses and can see how you’re spending your money, you’ll have a better idea about what you need to change to create your ideal budget.
3. Create a plan for the future
Your budget will need to include three things:
Start your budget by listing your regular income. You may want to include all sources of income, including tax refund, bonuses, etc, but make sure that your budget isn’t supported by these income sources. For example, I use my tax refund to contribute to my retirement fund, not to pay my mortgage.
If you have an uncertain income, like a sales associate’s commissions, try to base your budget on your lowest income. For example, if you typically earn $2,000 a month, don’t base your budget on last month’s $4,000 commission. If you have a good month and earn more than your budgeted amount, use the extra to pay down debt, save for a rainy day, or create an extra cushion in your budget.
When listing your expenses, refer to your last month’s (or year, if you have that information) expenses. Start by listing the most important categories, like your housing costs (rent/mortgage, insurance, utilities), food, etc. Once those categories are budgeted, add expenses such as dining out, clothing, etc.
Don’t forget to account for infrequent bills, such as quarterly utility bills or winter property taxes. You may find it easier (and less stressful) to break these bills into monthly amounts. Make regular payments to a savings account and then pay the bill when it’s due from your savings. I do this with my summer and winter property taxes. Each month, I save a percentage of the estimated bill. When the bill is due, I already have the money set aside to pay it.
Remember to be realistic as you’re creating your expense categories and listing how much you want to spend in each category. If you spent $538 dining out last month, is it realistic to only spend $50 next month? Even if you do cut your dining budget, you’ll still need to eat. Make sure that you’re considering the alternatives, like a higher grocery budget if you’re cutting things like dining out.
Setting up financial goals is the best part of creating a budget. Here’s your chance to take your goals from step one and figure out how to make them happen. I typically plan for these goals immediately after listing my most important expenses but before listing non-essential expenses like entertainment.
Some of your goals may seem daunting. If you have a goal to pay off $30,000 of debt in 3 years, you’ll need to pay approximately $850 a month. For goals like that, pay what you can, like $400, and then set aside any extra money at the end of the month as a principal payment.
After you list your income, expenses, and goals, play with the numbers until your budget balances. Get creative, and think about how you can reduce your expenses if they’re higher than you’d like.
Write down your budget categories and goals.
As you’re thinking about your goals, tracking your expenses, and figuring out your income, write everything down. Even if you end up using a budgeting software, like YNAB, to create your budget, it helps to see your budget. You don’t need to print it out and hang it on your fridge for everyone to see (although I’ve heard that works for some people), but having a hard copy to refer to will help you stay focused. You’ll be able to remember why you wanted to create your budget and see your goals, as well as see the progress you’re making.
Periodically reassess your budget.
At least quarterly, but possibly even weekly, take some time to review your budget. Make sure that you’re discussing your budget with your spouse and ask yourself the following questions:
Are you staying within your spending categories?
Are you on track to reach your goals?
Are you and your spouse still in agreement with your budget?
If you’re staying within your spending categories, well done! Now it’s time to challenge yourself. Is there anything that you can cut? If your utilities are high, try calling the company and renegotiating your rate or try a new cost-cutting technique, such as installing power bars for your electronics and turning them off when not in use. Use your newfound savings to allocate more money toward your goals.
If your spending is higher than your budgeted amount, try rearranging your spending. Can you allocate some of your grocery funds to cover your Tim Horton’s habit? If not, try buying a new brand of coffee and make it at home. Even if you splurge a little on coffee at the grocery store, it’s still cheaper than going to a coffee shop.
Your budget isn’t set in stone, and it’s ok to make changes as you try it out. Find out what works for you and try to find ways to fix the things that don’t work. For more tips on how to get back on track when your budget isn’t working, read this post or check out my Budgeting board on Pinterest.
Your budget should help you reach your financial dreams! If you already have a budget, make sure that it’s helping you get what you want out of your finances. If not, reassess and make sure that you have a solid plan that helps you reach your goals, streamlines your expenses, and creates a solid plan for your future.
Alison Lange is a farmer’s wife and mommy of two. She is the creator of Tickling the Wheat, where she shares strategies to savor the sweet and simple things in life. She writes about parenting, finances, and everyday life to encourage women to find balance in their roles as wives, mommies, and home managers. Popular posts include: How to Speed Clean Your Way to a Happy Home and Take Control of Your Spending