Monday, June 29, 2015

Budgets Part 1: Calculating Expenses

I am about to get really personal with you. Budgets tend to be a taboo subject, but they shouldn't be. Perhaps if we were all more open to talking about budgets and finances, people wouldn't be in so much debt.

I'm going to show you my method of creating a budget, and tips for sticking to it.

The first step- write it all down! Not just bills that you pay every month, but every expense you have. Don't worry about numbers right now, just write down everything you spend money on during the month. For example:

Rent / Mortgage
Homeowners / Renters Insurance
Cell Phone
Car Payment
Car Insurance
Health Insurance
Eating Out
Credit Card Payments
Children's Allowance
Church Tithings / Offerings
School Supplies
Household Items
Laundry Expenses
Home Maintenance
Retirement Accounts
College Savings
Student Loans
Children's Needs
Personal Hygiene / Grooming
Pet Expenses
Emergency Savings
Club Dues
School Expenses
Charity / Donations

If you've spent money on it in the last 90 days, write it down. I'm sure you will forget something, and that's okay. This is just a starting point.

Next Step- List your net income. If you have a variable income, take an average of the last three months and use that. We will discuss later how to handle a budget with variable income.

Now comes the fun part- finding out how much you really spend on each item. Most people are genuinely surprised by the results and grossly underestimate how much they spend every month. There are a few ways to do this. You can go back through bank and credit card statements for the past 90 days and write down / tally each expense. This can be cumbersome if you have multiple accounts, but is the best way to get an accurate total. If you would like a slightly simpler approach, I suggest using Mint. You can use it from your computer or download the app to any smart phone or tablet. I use the website when I'm at home, but have the app on my tablet for when I'm out and want to track a purchase. The first time you use it will take a few extra minutes as you set it up, but it is well worth the time and energy. I have used Mint for years and it is the best budget tool for starting out and staying on track. You will set up your account, and link all your bank and credit card accounts. I promise, it's secure, and you don't have to type in all the account numbers. Mint will automatically track and categorize every purchase you make. You can set up budgets, savings goals, and track debt payoff too. For now, you just want to track your expenses.

Feeling nervous? Realizing how much you actually spent on food last month? It can be very eye-opening to see everything in one place, but you can't fix a problem if you don't know what it is.

Now you need to combine everything. You can use a spreadsheet, computer program, or good ole pen and paper. I prefer to write it all out by hand, it ensures I don't miss anything and really makes it sink in. Take your list of expenses you created earlier, and add the amount spent. If you find an expense you forgot about, just add it to the list. Be honest with yourself, or this will never work. Don't try to fudge the numbers, don't brush it off as "a one time expense"- if you spent money on it, write it down. This budget is just between you and your partner, there is no need to lie or be embarrassed. I can't guarantee an argument won't ensue over how much you spent on groceries or how much he ate out at work last week. But I can promise you it will all be worth it in the end.
Tally up all your income, and deduct all your expenses. Are you in the hole, just barely breaking even, or are you the rare bird with plenty of money left at the end of the month? Did you rely on credit cards to make purchases? Right now we are only focused on getting everything out in the open- don't stress over how to fix it just yet. Knowledge is power, and you need to know everything before you can move on. Take some time to get everything together, include every expense, and talk with your partner about it. If there were cash withdrawals, be sure to account for where that money went as well. Once you have everything ready, you can move on to setting up a realistic budget.

Part 2: Setting Up A Realistic Budget