Fixing your money mistakes: Create a budget
In my earlier post 5 Common Money Mistakes, I explained how we intelligent professionals fall into a number of money traps.
Number One: Spending too much
Do you have a spending plan?
When I graduated college about 6 years ago, I didn’t have a spending plan. I was making more money right out of college than my parents were earning combined after 25 years of marriage. Two months after starting my new job, I traded in my Saturn for an Acura (and lost $6,500 in the process). I had about $70,000 in debt between student loans, credit cards and my shiny, new car. I did make one smart choice though. I stopped using credit cards. However, I was only making the minimum payments.
About 6 months later, I realized I was living paycheck to paycheck. I was making alot of money, but it was already spent for years to come. How was I going to get out of this mess?
I decided I needed to track my income and expenses. I tried using Microsoft Money and Quicken, but found that they weren’t flexible enough for my needs, so I switched to just a rudimentary Microsoft Excel spreadsheet.
3 steps to setting up a basic budget
You have an almost endless supply of tools and methods for creating and maintaining a budget. In my own experience, Microsoft Excel works great for most people, even most major personal finance writers. It’s easy and flexible, and most of you already own Microsoft Office. If you own an Apple, just use whatever you Apple people use for spreadsheets. 🙂 I also use Quicken to track receipts, payments and income for reporting against my separate budget.
Step One: Figure out your income. It helps if you get paid a regular salary, but if you’re hourly or have sporadic income, you’ll need to decipher a safe average to put down as your income. If you’ve been receiving high sales commissions lately, you’ll want to use lower figures until you’re certain the higher income is here to stay.
When determining my own income, I use my net salary rather than gross income. I personally don’t need to budget my taxes, and my benefits get taken out directly from my paycheck. I do, however, budget anything that could change easily such as pretax commuter benefits and 401k contributions. The rest of my paycheck expenses only change yearly, or in slight increments.
Step Two: Figure out your expenses. This is the tough one. I don’t micromanage my finances (yet) because I’m just too lazy. I track the big and consistent expenses like utilities (electric, cable, phone), credit cards, car payments, mortgage, life insurance, and gym membership. My wife and I also decided on a reasonable dining and grocery budget ($200/mth dining out for dinner and $200/mth for groceries), and keep track of receipts and run reports in Quicken. We also have a gasoline budget (currently set at $400) because we have lengthy commutes and visit friends and family out of town often.
Step Three: Organize it. Once you’ve listed all your income and expenses, you’ll want to put it in your spreadsheet. In our budget, we have the bills and income along the top row and the month and day along the left column. I track each month separate from the next in case I want to put extra towards a certain bill next month, or next year, or if we’re planning an extra income down the road.
With the income and expenses laid out across the top and dates on the left, you can just plug in the budgeted amount in the appropriate row and column. For example, if your water bill is due on the 15th of every month for $100 (on average), then place $100 in the water bill column on every 15th of the month down your spreadsheet.
You can download my sample budget spreadsheet here (134kb)
In my own example, the last 3 columns perform calculations such as adding my income or expenses for a certain chunk of time or calculating how much I’ll have left after the bills for that time period. If you double-click on the $0.00 amounts, you’ll see the cells I’m adding up.
Maintaining your budget
The hardest part to a budget, outside of setting it up, is sticking to it. You may spend hours or days piecing together your income and expenses, and then posting them into a budget, but once you’re done, you should only need to tweak when your bills or paychecks change.
However, keep in mind that a budget is meant to help keep you within certain spending boundaries. If you want to go over budget on a certain line item, you’re not supposed to just increase the budgeted amount for that item. If your dining budget is $200 per month, then eat $200 per month or less. Don’t bump it up to $250 because you want to go dinner with friends tonight. If you think you’re underbudgeting, then change the amount across the board, not just in one month.
Once you have a budget in place, you’re in a prime position to begin monitoring your spending habits. You can now see where you’re sending and spending your hard-earned cash. You realize you’re spending $1000 on Webkinz, or $50 per week on coffee. You’ll also know how well you can handle an emergency such as job loss or physical injury, and where you can trim the fat from your spending habits.
Take the time to budget. Once you do (and do it right), you’ll wonder how you ever got by without a budget!
Be sure to check out the rest of the series Fixing Your Money Mistakes: