Budgeting Basics

Budgeting Basics

June 11, 2018

One of the things I frequently ask clients is “How much money do you need every month?” Not surprisingly, the most common answer is “I’m not sure.”

It’s easy to not pay attention to how much we’re spending – we’re busy, and if we’re not spending more than we’re making, we’re fine, right? The short answer is - as long as you’re saving enough, you should be okay. But, how do you know if you’re saving enough if you don’t know what you need?

The idea of creating (and sticking to) a budget can be daunting, so I’m breaking it down into a few easy steps to help get you started.

Step One: Make a List of Your Necessary/Recurring Expenses

This piece of your budget should be straightforward. You’ll simply need to make a list of your recurring expenses that are “musts” each month (if it’s an annual expense, just divide by 12). This includes things like:

  • rent or mortgage payments
  • utilities
  • food
  • car payments
  • gasoline
  • insurance
  • property tax, etc.

When you total all these expenses up, you have your basic monthly obligation – these are the things you HAVE TO spend money on each month.

Though you may be able to cut spending a bit in some of these areas (reducing utility consumption or the grocery bill, for example), for the most part, these are your “fixed” expense.

Step Two: Make a List of Your Wants/Every-so-often Expenses

This is the area of the budget that I see most people struggle with. It’s easy to figure out how much your car payment and utilities are, but it’s a little more difficult to nail down how much you spend on clothing each month.

This category of expenses includes things like:

  • clothing
  • entertainment/eating out
  • car repair/maintenance
  • medical expenses
  • gym membership
  • personal care
  • vacation

If you don’t have a good sense of how much you’re spending in these areas, one way to estimate is to review your credit card transactions over the last year. Many credit cards companies will give you a year-end summary, breaking your charges down into individual categories like the ones listed above.

These are what can be referred to as your “variable” expenses. While some of them may be necessary to a certain extent, these are the things that typically go unplanned for until the expense pops up (like car repairs). This is also the area of your budget over which you have the greatest control over the dollar amount you spend.

Total up all these expenses and add it to your necessary/recurring expenses from step one to get a total for your monthly expenses.

Step Three: Compare Your Expenses to Your Income

The moment of truth! Is your take-home income greater than the total of what your expenses are? If so, great – time to decide what to do with that savings each month.

Wait, it looks like your income is more than your expenses, but you don’t have money to put into savings every month? Don’t worry – that’s where step four comes in.

Step Four: Start Tracking Your Spending

The easiest way to tackle this step is to automate it! Leverage resources like mint.com or other budgeting apps to start tracking what you’re ACTUALLY spending. If technology is not your thing, simply save your receipts each month and track how much your spending in different areas compared to the budget that you wrote out in steps one and two.

Once you can identify the areas where you’re overspending, you can easily make adjustments to bring your spending back into alignment with your income.

Now you can make spending decisions with confidence and quickly make trade-offs for things that are most important to you.

The goal of budgeting is to make sure you’re not only living well now, but that you’re preparing to live well in the future, too. Whether you’re trying to save 10-15% of your income for retirement or you’re already retired and want to make sure that your money outlasts you, creating and monitoring a budget puts you on the path for success!