Build a Budget You Can Use

Last week, I joined the 30-Day Budget Dare.  It had been a while since I actually built a budget and stuck to it, so it was time for me to start one up again.  For the entire month of May, we will live under the budget we drew up.  This experiment should help us get a better handle on our expenses.

If you haven’t already joined in and built your own budget, it’s not too late.  All you have to do is follow these easy steps:

Gather Your Spending Info

The easiest way to start building a fresh budget is to gather your spending information for the last few months. We use Quicken to track our expenditures, so we printed out a report detailing our spending by category since the beginning of the year.

If you don’t have your spending cataloged somewhere already, you can try looking through your credit card and bank statements to get a decent idea of where you’ve spent your money.  And since you’re not tracking it already, now is the perfect opportunity to start.  There are a number of free tools you can use, such as the free online edition of Quicken, Mint.com, Wesabe.com, a spreadsheet, or even something as simple as pen and paper.  Regardless of the method you use, it needs to be something you can stick with.

Work As a Team

Everyone who is affected by the budget should have a say in how it’s laid out.  To figure out our budget, my wife and I sat on the sofa together with the printout of our Quicken spending report and a pad of paper.  Over the course of about an hour, we had the majority of the budget figured out.

If you have kids old enough to understand the concept of finances, I heartily encourage you to include them in the process. Not only are they going to be affected by the budget, the process of building a budget is a great way to teach them about personal finance and financial responsibility.  Building a budget is a skill they’re going to need later, so let them start learning now.

Start Rough

Building a budget should include multiple sheets of paper, scratched out numbers, and running, rough totals.

• Start by listing your income first, followed by all your paycheck deductions. This way you know how much money you have to work with.
• Next, list all your “fixed” expenses. These are the once-a-month expenses that you know will come up and don’t change much from month-to-month.  For example, your mortgage or rent, debt payments, utilities, and any membership or subscription fees you will owe are fixed expenses.
• Finally, list your “variable” expenses such as groceries, personal care, and other non-fixed expenses.

Once you have all your categories listed, start assigning your monthly allotment to each.  Fixed expenses come first since you can’t easily change those.  Then fill in your variable expenses based on your estimates from the last few months and any events you know that are coming up for the month such as birthdays or planned outings.

Balance the Budget

Now it’s time to total up your numbers to see where your rough draft left you.  If you’re in the black, congratulations – you can move on to the next step.  If you’re in the red, it’s time to adjust and balance your budget.  Our original run-through left us in the red by about $500.

If you’re like me, you over-estimated a number of variable categories to give yourself breathing room. Unfortunately, you’ll have to tighten that belt.  For instance, we originally budgeted $200 for clothing since my wife has no summer clothes that still fit (she has lost weight since two summers ago when she was not pregnant through summer).  We decided to cut that down to $100 and plan for an extra $100 in June.  We also cut back on our dining out since eating in is much cheaper.

If you find you don’t have anywhere to easily cut back, it’s time to make more painful cuts since you can’t afford to operate in the red for long.  It may be that your fixed expenses are too high – see if you can renegotiate some of your debt payments or find out if your landlord would accept a smaller rate for a short term while you shore up your finances.  It won’t be easy, but you’ll have to find some way to get back into black.

Force Money to Savings

The ultimate goal of budgeting is not to live within your means – it’s to learn how to live below your means. If you’re not pushing money to savings as part of your budget, you’re just treading water and losing your income could sink you permanently.  We regularly save around $250 each month outside of my 401(k) due to a few automated savings plans I’ve set up.  That money gets budgeted just like everything else.  If your savings category is $0, you need to take a long look at your expenses and decide if they’re worth the risk of not having a savings buffer.

Aim for Zero

A budget with money left over is a subconscious invitation to spend and is the easiest way to derail your entire budget. If you’ve totaled your numbers and your listed expenses are less than your income, you’re either not marking enough for the categories you’ve listed or you’re not pushing enough to savings – and it’s usually the latter.  After balancing our budget, we freed up an extra $100 and immediately added that to the savings budget.

Follow the Budget

Once your budget is down on paper, you’re done with the “easy” part.  The harder part is actually living by your budget.  If you’re not used to having to follow a budget this may not be an easy transition.

The best way you can help yourself succeed is to remember that you made this budget for your self and your future.  Following your budget will only benefit you; breaking the budget will hurt you.  Just stick with it, even through the difficult patches, and you’ll come out ahead.

I’ll check back in in a couple of weeks to share how well we’re doing and I want to hear then how you’re coming along, too!  If you have any other tools or methods you use to build your budget, please share in the comments. Let’s all help each other succeed.