Home > Money Management > Budget Basics #2 – Starting a Budget

Budget Basics #2 – Starting a Budget

First step to budgeting… do something.  You can finesse the process as you go along, but you have to begin somewhere.Like many tasks in life, one of the hardest things is getting started, especially if it’s something you prefer not to do.  How many diet, exercise and financial plans have been delayed until tomorrow?  So let’s get started. 

For your first step, my recommendation is tracking your current spending.  It can be difficult to budget how you’re going to spend your money if you don’t know where your money is going.   Relax; this isn’t as difficult as you may think. 

In the present electronic age you probably buy a lot of things with your debit or credit card, and you may pay some of your bills online.  Copies of your recent bank and credit card statements will probably capture the bulk of your expenditures.  If possible, I would recommend using the past three months’ statements.  By averaging out multiple months, you should reduce the impact of atypical expenses.

Create a simple four-column Excel spreadsheet; a column for each month, and the fourth column for the three-month average.  Next… decide on some income and expense categories.  The advantage of using Excel or something similar is the easy ability to add or eliminate categories.

A common question is how many categories should I have?  It all depends upon how tightly you are trying to manage your finances.  If you’re on a very tight budget, then I recommend more detail.  The more detail you have, the more you can assess your spending.  Be honest with yourself and your situation.  Unnecessary information can actually reduce the effectiveness of your budget.

Consider utilities as an example.  If you have no intention on altering your behavior no matter what your utilities cost, then simply group everything together as utilities.  However, if want to explore ways to reduce your electrical, heating, water or cable bills, then you should segregate them into different categories.

The next task is pouring through your statements to see where your money went.  It may seem like an arduous process, but I think you’ll find it can go rather quickly.  Depending upon your financial institution you may be able to download your transactions into a spreadsheet or a program like Quicken (I’ll talk more about tools and software later).  Even if you can download the info, I suggest you compare the downloaded information with your statements.  The software may classify things in a manner that is not helpful to you.  I encourage you to take your time with this step.  It may seem tedious, but in the end, it will help provide you with a clearer picture of how you’re spending your money.

The next step for this exercise is calculating the average expense for the number of months you input information.  Unless you like running a calculator, the average function in your spreadsheet should make this an easy task. 

Take a look… any surprises?  I would be amazed if you did not look at a category or two and say, “Wow.  I didn’t realize I spend that much on____.”  It happens to best of us.

Congratulations!  You did it.  You got started.  Slap yourself on the back.  High five yourself.  There is more to do, but you just performed a critical step to creating a budget.

In Budget Basics #3, we’ll consider some of the tools and technology that you can use to help you create and monitor your budget.

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