Building a Budget

The concept of budgeting gets thrown around constantly. And rightly so, because it’s an important piece of creating a healthy financial picture. But you can’t stick to a budget if you don’t have one. With all this talk about budgets, how do you get started making one? There are a number of different ways you could go about creating your budget, but I think the best way is to look at your recent spending habits.

First, think about your standard necessary living expenses. Things like rent or mortgage payments, property taxes, car payments, student loans. Anything that is really non-negotiable – meaning expenses you don’t have an ability to cut back on if money gets tight. It’s good to start with these items when creating a budget, because it allows you to see how much you really have left after you have paid all your required bills

Next, pull out your bank and credit card statements from the last 3 months and start creating categories for your purchases. If you frequent the same coffee shop every morning, make ‘morning coffee’ a category in your budget. If you eat out a lot, make ‘restaurants’ a category. Find your average monthly expense for each category based on the last 3 months. If you know that the last 3 months is not an accurate picture of what you normally spend, adjust for that accordingly, or use statements from 3 months you know represent your typical spending habits. Go through all of your purchases and try to get every one of them to fit into a category. If you have random items that just don’t fit anywhere, you can make a miscellaneous category at the end.

Once you know how much you typically spend in each category, you will have to decide how you feel about that spending. Are there categories where you would like to cut expenses? Categories where you were surprised how much your spend, once you added it all up? If there are categories where you want to reduce your spending, great! Just be sure to be realistic in your goals. Start small and once you achieve that goal, you can reassess and decide if you can or want to cut even more.

This is also a good time to start thinking about what you want to be putting into savings. Hopefully once you have added up all the items in your budget, you have some money left over that goes into savings. Even a small amount is good, but the more the better.

No matter what, the total from your spending categories can’t exceed your total earning for the month, after taxes. If it does, then it’s time to start cutting back on those optional budget categories.

Once you have created your budget categories, keep track of your expenses each month and put each expense into a category to ensure your expenses don’t exceed your budget in each category for the month. You can keep track manually on paper or in a spreadsheet, or there are apps and websites you can download that will automatically calculate, but you will need to go in to check and correct the categories for some purchases, as the software will guess the category based on the store and doesn’t always get it right.

Check back for an upcoming post on how to stick to your budget once you have created it.

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