It is generally accepted that having a budget makes good financial sense. In the complex world of personal finances how can you get where you want to go when you don’t know where you’re starting from? For example, how do you purchase a house or plan for retirement when you don’t really know how much money you have?
Why do you need a budget?
In a word: Control. In order to reach your monetary goals you have to have control over your money. Is that going to make the electric bill any less because you monitor it? Of course not, but by monitoring your budget you can see exactly where your money goes. That is the first step to controlling it.
Budgeting made easy
No, really. Creating a first draft budget isn’t difficult. There are many computer programs that will help you do this such as Quicken and Microsoft Money but to really gain an understanding of your finances you may want to start with a simple Excel spreadsheet. There are templates for budgets on Microsoft’s website, but if you want to try it on your own create a few basic columns to start. For example:
Budget Dec-06 Jan-06
Medical amp; Prescriptions
You may be tempted to budget on a biweekly or weekly basis, depending on how often you are paid, but starting off with a monthly budget gives you the perspective necessary to understand where your money is going.
Notice that this budget isn’t fancy. You can use simple Excel functions to subtract your expenses from your income. At this point you will likely only be 100% certain on a few of these points. Your rent (or mortgage) payment likely does not differ from month to month and neither will certain other bills like your car payment. For items you pay on an annual or biannual basis (i.e. insurance) check your last bill or estimate the amount and divide it into monthly increments.
Determining actual expenses
Now for the fun part! There are a few ways to go about determining your actual expenses and some are more painful than others. If you are the type of person that puts everything on their checking account debit/credit card this part will be much easier for you than your cash-carrying friends. Simply go into the next workbook of the excel spreadsheet you created and Create columns for all of the items you listed on your budget, then grab the latest copy of your bank statement. Go through every transaction and add it to its’ respective column.
This may take a bit of time, but it is far easier than going through receipts when you pay with cash. If you prefer to pay with cash for certain items, either keep the receipts or keep a notebook around and jot them down on a list. You may miss a few things this way, but it will probably be fairly accurate if you make the effort. Once these are totaled, check the totals against your budget estimates. There will likely be a few areas that will surprise you.
To verify the accuracy of your income, take your last few pay stubs (or last one if you are a salaried employee) and average your income, taxes and cost of benefits. Place these numbers into your budget. For the bills you pay on a less than monthly basis, verify your estimate by checking the last bill, checking your last payment if it came out of your checking or other account, or make a quick phone call to the company and check the amount. If you are comfortable with your estimate use it until the next payment is due on that account.
Tracking your Budget
Now that you have determined your actual income and expenses it is relatively easy to maintain your budget. If you get a raise or a new car, simply adjust the amounts accordingly. When the season changes adjust your gas and electric budgets to the new amounts you are billed. The amount of time you want to spend and the level of control you want over your budget will determine the number of changes you make to it from this point forward.
Regardless, you should of course make any of the obvious changes mentioned previously and you should perform a yearly (or more often) audit of your budget. To do this, simply go through another bank statement and keep track of cash expenses for a month. Make the necessary changes like you did to your original estimate. Auditing your budget will be easier than the original write-up as you already have your expenses itemized into columns.
Power over your money
Now that you have completed your budget, you have the power to evaluate your finances to see where you can make changes to meet your goals, and it will give you the power to monitor the spending habits you hope to change so you can make adjustments as necessary. Creating a budget will give you a good understanding your money; this is the first step to controlling it.