One of the most powerful tools in any personal finance arsenal is a budget. Unfortunately, many people make it much more complex and difficult than it needs to be. As far as budgets go, simpler is better!
START WHERE YOU ARE
The sooner you take advantage of a budget, the sooner it will start working for you. A budget is not something to begin “when I am organized.” This is a tool to help get you organized.
First, get a list of what you have spent money on in the last month, or whatever time frame you can find. Many banks offer online banking, and then you can view all of those transactions online. Otherwise, your monthly statement will usually list all transactions for the last period.
Make a list on a blank sheet of paper of some basic categories for what you spend money on. I recommend somewhere between 10 to 15 categories. There is a list to start you off in the sample budget form below.
Go down your list of transactions on statements and mark them with a category. Don’t worry so much about classifying everything right down to the dollar. Don’t worry about splitting one purchase between categories either. We want this to be EASY. For instance, if you go to WalMart and buy mostly food, but also spend a little on clothes, just keep it all under food.
Tally up the total you spent last month for each category. Then think about what’s going to be different this month. Perhaps you have some plans that will create more spending in the entertainment category. Maybe you want to budget a little extra for Auto because you need an oil change and gas prices are going to be a little higher too.
Write each category and what you plan to spend this month on a sheet of paper, or in a spreadsheet program. You could even use something free like Google Docs and create a spreadsheet that way. This is your first budget, and once you think it’s reasonable, don’t change it. Here is an example format for the budget.
BUDGET____ACTUAL__CATEGORY
$1700_____$0______His_Paycheck
$1700_____$0______Her_Paycheck
______________________________
$3400_____$0______Total_Income
$500______$0______Food
$1020_____$0______Home
$750______$0______Auto
$400______$0______Utilities
$200______$0______Medical
$100______$0______Savings
$200______$0______Debt_Payments
$30_______$0______Pets
$100______$0______Entertainment
$100______$0______Clothes
______________________________
$3400_____$0______Total_Expenses
UPDATE IT WEEKLY
Update your budget weekly. Later on, you can do it more or less often. Make this something you do at a certain time each week, for example on Thursday nights after you have put the children to bed.
If you have online banking, this is really easy. Just log on and categorize your transactions. Add up each category and be sure to write down for what period you did the update. For instance, write 1/1 – 1/7 to the side. The next week, just write 1/8-1/15 below it.
If you do not have online banking (or do not want to use it), there are a few other options. Keep your checkbook register updated, and then use that as your transaction log. You can even put the categories down at the time of the purchases when you write in the amount. Alternatively, you can usually get a list of recent transactions from an ATM machine (there may be a fee) or keep your receipts.
After you’ve updated the amounts, take a few moments to review your budget. See where you are on target, and where you have spent too much. Perhaps you will need to add some categories you did not think of before. That is fine, this is your budget and you are the master of it! You can even take some money out of one category and put it into another one. The main thing is that you are doing it on purpose.
IT WON’T WORK! (AT FIRST)
The first time you do a budget, it won’t work! You should realize that this is the first time you have actively tracked your spending patterns on paper. It is going to take at least 3-4 months before you are able to say, “Hey, this is really working!” For now, you are in training and it is unreasonable to expect overnight success.
Your progress will be amazing after a few months. Looking back at your financial life before a budget will cause you to kick yourself, and the contrast from then to now will be apparent.
The sooner you start, the sooner you will be successful! No one will do it for you, so what are you waiting for?