Getting Started – Part Three B – Creating A Budget That Actually Works
This is part b in a series on creating a budget that actually works.You can read part a here. In part a I set the homework of spending a month putting all bills and receipts into a shoebox. Here’s what you’re going to do next. Before you start, you’ll need your shoebox and a computer with some sort of spreadsheet software, your budgeting software of choice (I use YNAB), or a pen, paper and calculator.
Step One: Take out all the bills and receipts and de-dupe them. That is, if you took cash out of the atm and have receipts for things you paid for in cash, remove the receipts and just keep the ATM receipt. If you have bills and a receipt for paying them, remove the receipt (but be sure to mark the bill as paid).
Step Two: Go through all the bills and receipts you have left, and sort them into categories. Here are some rough ones that I suggest, but put them into whatever piles suit you best.
- Charity (including regular & ad-hoc donations – this is particularly good as a category for your tax return!)
- Clothing / Shoes / etc. (including cleaning, repairs & purchases – you can subcategorise these later if you want)
- Food (groceries & eating out)
- Health (insurance, scripts, vitamins & professionals – eg. doctor, dentist)
- Household (insurance, mortgage, rates, purchases (eg. furniture / maintenance), housekeeper, utility bills can also be included here)
- Personal (grooming – eg. hairdressers, makeup products, etc. hobbies, career expenses (also good to have for your tax return), recreation & entertainment)
- Transport (car insurance, registration, maintenance, servicing, fuel, parking, taxis & public transport)
- Utilities (if you didn’t include them under household)
Hot tip: if a receipt fits into two categories, you need to rethink your categories. They should be broad enough that more than one receipt fits into them, but specific enough that there’s never two camps for one receipt.
Step Three: Have a think about other bills you pay or things you buy which might not happen every month, but more like every quarter or year. For example, insurance, rates, some bills like water or electricity can often be billed like this too. If you can, dig out the last one of them that you paid, add 5% and then divide it by the number of months between bills. For example, a $100 bill you get every quarter, you’d add 5% to make it $105 then divide it by three to get $35 per month. If you can’t find the last bill, make your best guess but add 10% and do the same.
Step Four: Write down or otherwise record all the ways you regularly get money. This includes things like your salary, board and rental income, dividends, babysitting money and anything else you get on a regular basis. If it’s stuff you’ve sold on eBay or money you found in the street though, don’t worry about it here – it’s irregular and we can’t budget with it.
Step Five: Add up all your income sources for a calendar month. It doesn’t matter if you get paid weekly, fortnightly or monthly, you’re going to budget per calendar month.
Step Six: Add up all your monthly expenses per category – including those you noted that you don’t pay every month, but you’ve calculated how much they would be each month if you paid them like that (this was in step three).
Here’s the big question. Are you spending more than you earn? If so, you’re going to need to stop that quick smart, so start looking for fat in your expenses – ie. where you can cut back. I’ve written a post before that might help you come up with some ideas – read it here. If you’re not and you have some left over – congratulations! You’re on your way financial success. If you haven’t already, read my post on working out your goals.
Step Seven:In your budgeting software, record all the different types of regular income you have, as individual items. eg. if you earn a salary, record that figure separately from, say, rental income. Next, enter all the categories of expenses you have that you identified when you were sorting your bills and receipts in step two. Finally, record the amount you spent last month, plus 5% in each of these categories (you should have these numbers already from step six).
This now forms the basis of your budget.
So, if you’ve read part 2 of this getting started series you’ll know what your goals are and how much you need to put aside to achieve them. I’m currently working on smartening up my Mandarin skills (I’ve been learning for some time), and I know this costs me $130 a month. I’m also saving for my wedding in January. This means I’ve been putting away a certain amount each month pretty much since we got engaged 18 months ago so I’ll be able to pay for it in cash.
The next question you need to answer is… is there enough of a (positive) difference between my income and expenses that I can put aside enough each month to fund my goals? If not, what would I be willing to change to free up the necessary cash? Add another category to your list to cover your goals. If there’s an actual expense every month associated with achieving your goal, like my Mandarin classes then you’ll probably add it as a subcategory under ‘personal’ or whatever you chose. If it’s something you won’t be spending the money on for a while, you can probably add a category like Savings and then have subcategories (emergency fund, travel, wedding, etc.).
Step Eight: Maintaining the budget. Now, anyone can work their way through the first seven steps listed here. The trick to going from amateur to pro in the budgeting world is knowing how to maintain it. So, you’re going to keep that shoebox or folder or whatever it was you used before and keep sticking receipts and bills in it. Preferably every week (it’s waaaaay easier if you do it this often) you’re going to record all your expenses into your budget. You’re doing this for a number of reasons:
- Doing it every week means that you can see if you’re going off track and correct it before the month is up.
- Being this involved with your money will help you to understand where it goes and will also act as a subconcious incentive to stay on target
- Doing it every week is a lot quicker and less painful than doing it every fortnight or month.
If you have an iPhone, there are apps that will help you with this step.
I can’t stress enough the importance of step eight. If you’re not willing to do this, you deserve to be in a poor financial position and you deserve to be bad with money. If you just can’t do this for some reason, you can use an automated tool like Mint, Wesabe or ANZ’s MoneyManager (the links are in the toolbar on the side of this page) – it will categorise your transactions and add them up for you. I really recommend doing it yourself though – even if only for a few months. What you learn will be invaluable.
Good luck! Budgeting successfully really is easy… and whilst it might not seem like it at first, it really is a type of enjoyable when you have complete financial peace of mind.
Questions? Comments? Feel free totweet or email me!
No related posts.
Related posts brought to you by Yet Another Related Posts Plugin.
