Do I spend more than I make in a given month? If you can’t immediately answer this question then you may possibly need to make a budget. If you already have a budget, you may need to revisit it to ensure your budget is realistic enough to live off of. From time to time you may want to just do this as an exercise, either to reset yourself or to plan for a lifestyle increase (e.g. buying a house, or moving into a larger one).
Income
The first step in creating a budget is to determine how large the budget can actually be. This will be based on how much we are making. When we get to step two, we will determine, do we need to make more (e.g. get another job) or are there things we can cut out to get within budget. This will improve our cash flow leading us to be able to save and invest.
Spending Habits
The second step in creating a budget is to find out how much you are actually spending. To do this I collect the last four to sixth months of banking, checking, and billing statements. Once I have these separated out into the different months, I categorize all of the charges and payments. The main categories that I would break these expenses into are Savings, Living Expenses, Food & Dining, Financial, Gifts & Donations, Education, Entertainment, Travel, Planned Expenses, and Everything Else.
Savings
Typically, most people are saving whatever is left if anything at all. If you have recurring balances or debt payments that are getting larger you may be spending more than you make and that is something that needs to be acknowledged NOW. Then go fix it by getting another job or by decreasing your expenses. If you already have excessive debt under control, then set a goal to save every month. A good way to ensure this happens, is by using an auto draft or an allotment before anything else is spent. Prioritize your savings above your spending. Once I started doing this, my savings dramatically increased and we (my family and I) “learned” to live off the rest.
Living Expenses
How much you should spend on living expenses can depend on many things such as on the size of your family, what city you live in, what kind of job you have, etc. The focus should not be on ideally where do you want to live (we will work towards that), but rather what can you afford while providing safety and security for you and your family. There have been times where I chose to live in an area that was more expensive at the detriment to how much a month I could save. This choice is always a balance on getting to future goals while providing for your family’s emotional or physical well-being. Main thing to remember is where there is an increase in living expenses there is also an incremental increase in bills and utilities.
Food & Dining
This part of my budget has GROWN THE MOST. From when I was single and before I was married, to now being married and having four children, it is surprising how much more I spend now than 10 years ago. This is also the one I would recommend most people to pay attention to. In my experience, this is one of a few that can get out of control the quickest in a given month based on laziness or convenience. Going out to restaurants and ordering food in can almost cause this to double just because of a few days per month. For this reason I would recommend having groceries and dining out as subcategories of this budget. In doing so, you allow yourself the flexibility to go out while also setting responsible limits for yourself.
Auto
Whether you are buying or leasing, unless you have paid cash for the full amount, you have or have had an auto loan. This is one part of the Auto budget. Other costs to think of are annual taxes (registration fees), maintenance costs, and the most common gas. If you have an electric vehicle then this is a portion of your electric bill.
Other Areas
Other areas of the macro-budget with some examples can include (but are not limited to):
- Financial – life insurance premiums, health insurance premiums, car insurance premiums, etc.
- Gifts & Donations – tithing, giving to non-profit organizations, soup kitchens, or other causes.
- Education – kids clubs, tuition, extra-curricular activities.
- Entertainment – allowances, movies, theme parks, museums, or anything you would do for fun.
- Travel – any planned travel for vacations or work, typically includes air or hotels.
- Preplanned Expenses – Making sure that things don’t creep up on you is big. Celebrations that happen every year such as birthdays or holidays can be broken down over a couple of months and saved up for rather than throwing off an entire month’s budget. Essentially saving up for any large expenses before they happen.
Everything Else
ALWAYS plan for the unplannable. This might not make sense but the last category should always be a buffer category. Let me explain. If you need cash, and use an ATM that is not your banks, you could experience an ATM fee. Buying an unexpected birthday gift for a child’s friend (that came up during the month rather than before) could be another. Really what we are doing is providing a buffer for what cannot be accounted for. This amount is different varying from person to person and can be larger or smaller as you go on and continue to refine your budget from month to month.
Once You Have A Plan, Stick to it!
Once you have a plan. Go back every could of months and refine the plan. If you want to be more detailed and will stick to it than do so. Sticking to a plan prevents us from overspending in months where we would receive a bonus or any other unexpected source of income. Most people who over spend one month will typically overspend the next month or two as they try and reign it back in. Every time you get a pay raise or want to increase your lifestyle, plan a new budget. Focus on Saving and keeping all your expenses reasonable. This plan is what will help us to achieve our longer-term goals.