Budgeting...Where Does a Person Start?
The hardest part about budgeting is getting started. If a person has never created a budget or created one and failed, then it can be an overwhelming task. The second difficult part about budgeting is following it once it’s created.
The first step to creating a budget is to look at your historical spending. Take the past 12 months, if possible, of your spending and income and write it out in a month-by-month format. When completed, it will look like a 12-month budget, but it will be your historical budget. Creating a historical budget can be done by creating a simple transaction history on paper for each month or using Excel. Or, you can use the free Historical Budget Excel Workbook available on the Freebies page on this website. The Historical Budget Excel Workbook is exactly the same as the In-Depth Budget Excel Workbook. If you are not familiar with using Excel, then use the Simple Budget Workbook on the Freebies page and enter one month at a time. Print out each completed month before clearing the workbook and starting the next month.
Enter your income and spending down to the penny. If you used any credit cards or loans, such as a home equity line of credit, to make purchases, enter those items into your historical budget in the month the money was spent. This will take some time to complete, but it’s a very important step. It’s difficult to create a realistic budget that represents your financial spending habits if you don’t have a clear picture of what it looks like. Therefore, before you get started with creating your budget, make a commitment to create your historical budget.
Once you have created your historical budget, analyze your spending habits over the past year. Here is a list of questions to ask:
- Are there categories where you spent more than you realized you were spending? Such as “dining” or “clothes”?
- Did you have any months where you spent more than you received in income?
- Did you need to use a credit card to “make ends meet” in a particular month?
- Did you have any lump sum payments? For example, did the annual or 6-month car insurance bill come due?
- What surprise expenses did you have?
- What categories could you spend less in each month?
- Did you put any money into savings?
The above list of questions will most likely cause you to ask yourself other questions. Some of the questions are difficult to ask, but don’t let that stop you from asking them. If you feel you have failed in your spending, don’t let that get you down. Let that spur you on to create a budget that you can be excited about using.
The next step is to create a new budget. One that allows for savings, but trims spending where possible. Be realistic though. For example, I love drinking Starbuck’s Black Iced Tea Unsweetened. I just do. It’s costly at approximately $3.00 for a Trenta-size drink. Of course, if I hang out at the Starbucks, I can get a free refill using my “gold” Starbucks reward card, which lowers my cost of the drink, but it doesn’t change how much I actually spent. My habit, though, was getting quite expensive when I realized I was easily spending $20, if not $30, a week drinking their tasty tea. That just wasn’t going to work in the long run in our family budget. So, I had to trim my habit, but I needed to be realistic. So, I limited myself to one Trenta-sized Black Iced Tea Unsweetened to each Saturday morning when I typically run my errands. It has worked! I’m satisfied that I get my favorite treat once a week and I’ve slowed my spending way down.
The tea story also shows that you shouldn’t give up on your budget, which is the third most important part of budgeting. Many people give up when they can’t follow their budget, because they probably think, “I’ve created this budget and I MUST follow it exactly!” When creating your new budget, realize it’s a “living, breathing” object. It’s not set in stone. Try to follow the budget for at least three months before making any tweaks to it, but allow yourself to make necessary changes. Some create a realistic budget, but they have a difficult time saying “no” to themselves and/or others.
When creating your new budget, keep in mind that payments (e.g. car insurance) or expenses (e.g. Christmas presents, vacations, school supplies, etc.,) that come due once every six months or annually should be broken down and budgeted for each month. For instance, if your car insurance is $1,200 annually and you pay it on a semi-annual basis, that would mean a $600 lump sum payment is due every six months. You can prepare for this payment by budgeting $100 a month to go towards your car insurance. If you transfer these future payment allocations to a savings account, the money will be “out of sight” and easier not to spend. Once the bill comes due or you need the money for the planned expense, transfer it to your checking account to pay the bill or use the money.
If you’re a high school or college student, you can follow this process now. Your spending needs will most likely be much less, but getting into the habit of budgeting now will make it much easier as you get older and have more financial responsibility.
Start working on your new budget today and never give up! Budgeting is always a work-in-progress.