This is the first part of a three part series on budgeting I plan to run for the next three Wednesday’s. I will discuss what I feel are the three critical pieces of budgeting, 1.) Know Your Spending, 2.) Creating Your Budget, and 3.) Tracking and Reassessing.
Creating a budget is the first step to financial freedom recommended by most personal finance advocates. There a many ways people go about creating and managing their budgets. Systems like You Need a Budget, Budget Pulse, Mint, and beyond all include budget calculators you can use to help set your budget. Before you can effectively setup your budget however you need to make sure you know exactly where your money is going. Too many people sit down to create a budget and arbitrarily assign values to their budget categories based on a guess of what they think they are going to spend. This may work for some but when you are spending $400.00 a month eating out and you assign that category $100.00 in your budget you are going to fail pretty quickly.
For at least one month, more if you can go back in time, you need to track and see where every penny of your money is going. Start tracking your expenses under the following Major categories:
- Automobile (repair, maintenance, gas)
- Personal Care
- Credit Card(s)
- Student Loan(s)
- Vehicle Loan(s)
These categories are not set in stone, and I would expect your categories to be a little different, I only provide them as a place to start. Now that you have your base categories set, you need to track your spending. If you use online banking you have access to several months of your recent spending and can probably get a pretty good idea of your last several months of spending. Some people choose to track their spending in an excel spreadsheet or on paper. I use GNUCash, you can use GNUCash, paper, excel, Mint, Yodlee, or whatever suits your fancy.
You just need to make sure you have accounted for all of your spending and it has all been giving a specific category. As you go through the first month tracking every expense you may find expenditures which don’t fit your original list, just add a new category. That is part of the purpose of this exercise. You want to make sure you have accounted for all of your expenditures so you don’t miss a budget item. A complete list will provide you good solid numbers you can use to create your first months budget.
Next week we will discuss setting up your actual budget. Stay Tuned for more to come, if you want to be sure not to miss the rest of this series you should consider subscribing to our feed.