Sure-fire ways to establish (and adhere to) a budget
Part One - Plan and Create
Sure-fire ways to establish (and adhere to) a budget -
By now, we've all been hit with the holiday bills. In my house this always leads to the mid-January New Year's resolution to pay off debt/save money/stop spending so much. It seems that no matter how good a deal we get on the things, we never have anything left to put towards savings every month. If you can relate to that, then I invite you to join me in figuring out how to establish and actually keep to a budget in 2015.
First things first, you have to know how to work with a spreadsheet. You can even choose with program you're most comfortable with. We've created ours in excel but Google spreadsheets are great too (and free).
Step 1: Track your monthly spending habits
The first step to any budget is figuring out where all of your money is going. Keep track of everything you spend money on in a given month. Create a spreadsheet where you can list where you spent the money, how much and what you spent it on. Be sure to list everything - house, car, insurance, food, etc. And remember, no dollar amount is too small. The only way this exercise is successful is if you list everything. I've heard of people going as far as to itemize each receipt, completely up to you how detailed your list is.
Step 2: Spreadsheet review
At the end of the month, add up this list. Make sure you're sitting down for this - If you're like me, you'll be shocked at how much you spend. The next step is to sort your list. For the first pass, keep to broad categories such as housing, utilities, food, entertainment, shopping, etc. Once you've done the initial sort, you may want to add sub categories. For example, under shopping you may want to include sub-categories such as clothing, toys, etc. Once you've decided on your categories, sort all of your expenses for the month into these categories and add up what you spent in each. This will be the foundation for the budget that you create for the next month.
Step 3: Create your monthly budget
Still with me? I know you're probably in a state of shock, but don't worry - once you're organized and have a plan, staying on budget isn't as daunting as it may seem. Now we're going to put together a budget spreadsheet to help identify what we are going to spend in the upcoming month. I typically create a spreadsheet with the categories in the left hand column and the months across the top.
Next, break down you spreadsheet into five sections:
- Monthly income: In this section you're going to list the money that you earn every month. For most of us it's our paycheck from work (unless you have a rich grandmother that left you a huge inheritance).
- Monthly reoccurring payments: In this next section you're going to list any of your monthly payments such as a mortgage, car payment, day care, utilities, etc. These are set (or close to set) payments every month. This section will help you figure out how much disposable income you will have left over. Here's a YAY! Savings Tip - In this section I also try to account for items such as food shopping or purchasing gas since I know that even though they aren't a set amount every time, they are expenses that I can't make it through the month without incurring. Use your list from last month to estimate these expenses and as you continue to keep your budget you can update them.
- Monthly variable payments: Things like credit cards fall into this category. They are the expenses that can vary month to month. If you have credit card debt that you will not be able to pay off in one month, include another row underneath this row to figure out the monthly payments you can afford and how many months you'll need to pay it off.
- Savings: You only have to include this section if you plan on allocating a portion of your paycheck towards savings every month.
- Monthly summary: In this section include a line that sums up the reoccurring and variable payments and another that subtracts the total expenses from your monthly income.
If this is your first time budgeting, there's a good chance that you're spending more than you make, or else you wouldn't be reading this. Now, go back to each category, look at what you spent in that category, and decide where you can trim some fat. Maybe you can spend less on clothes or bring lunch to work. The goal is to find areas of unnecessary spending and try to change your spending habits so your expenses don't exceed your monthly income.
Once you've set some realistic targets, spend the month sticking within those targets. Continue to keep a categorized list of your spending and regularly update your budget with your totals in each category.
The first month is going to be difficult as you get used to restricting your spending. Don't give up! Keep making the effort and you'll eventually get there. After you make it through the first month, it will get easier and easier. And don't worry if you still go over the first few months; it is not easy converting your mindset from an overspending one to an underspending one. Just keep trying - thinking about it and trying to make changes is half the battle.
Have a budgeting tip you'd like to share? Let us know