Now that you have spent a month tracking your spending, or at least gone back and accounted for a months worth of spending it is time to setup your budget. Next week we will talk about maintaining and reassessing your budget.
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. Budget software abounds everywhere from You Need a Budget, Quicken, GNUCash, to Budget Pulse, Mint, and beyond. You can also just use a simple spreadsheet or a piece of paper for your budget.
Budgeting in its simplest form is just creating categories for your spending and assigning yourself a maximum value for that category. A truly complete budget should result in a zero balance of cash for the month, everything coming in should be assigned to a specific category leaving you with no “excess” income. This way you know what you can spend and where you want to spend it. If you spend more in one category you will have to sacrifice in a category somewhere else.
Lets talk a little bit about the categories you are going to use for your budget. Categories you use for doing your budget most likely should not be as granular as the categories you use to track your spending. Keeping your budget at a higher level keeps your budget smaller and easier to manage as well as ensures you are less likely to go over budget in a specific category. I think most people give up on budgeting because they budget at too granular of a level and are constantly “blowing” the budget in certain areas. This leads to discouragement and a feeling of failure that is easily removed by eliminating the pesky budget. You should be granular but not so granular that you are spending an entire day updating your budget and reallocating funds. So while you may have a dining out budget item, you shouldn’t probably have a dining out: breakfast budget item.
Don’t forget to include your income, you can’t achieve a balanced budget if you don’t include the income as well as the expenses. Use your most recent paychecks to estimate if you are paid hourly, if you are salaried you should have a good idea of what your checks will be each month.
When looking back at your spending for the past month make sure you identify how much you spent on each of the categories you have chosen for your budget. You can use this amount as a basis for how much to budget. Determine how much money you want to go to each category, be sure include your savings and other investments, as well as your estimated income, keep in mind you want to end up with 0 dollars left over.
If you haven’t already you need to site down with your spouse, significant other, or whatever and discuss your budget. You both need to agree to the budget and agree to stick to it. Otherwise you are almost certain to fail, trust me, I know.
If you are interested in a simple spreadsheet for setting your budget moving you can view my GoogleDoc Budget Sheet