Last week we reviewed 3 simple steps to create a budget. If you missed that post, you can read it here. Now that you have a budget, let’s talk about how to actually live with it.
1: Track your spending. The best way to see if your budget is accurate is by tracking your spending for the first month. You can do this several ways. Choose a way that is easy for you and does not create a lot of work for yourself. Remember, SIMPLE is the name of the game. If it feels like added work, you are more likely to give up. Also keep in mind, it has been said it takes 21 days of doing something before it becomes a habit. Keep at it for at least 3 weeks. To track your spending you can use your online banking system, or a notebook and a pen. Again, whatever works best for your household. Be sure to write down every expense. If you are using your online banking system, make note if you take out cash, where did the cash go? During this first month, it is all about tracking, not about changing behavior. You have to first understand where your money is going before you make any changes.
2: Compare to your budget. Once you have a full month of spending tracked, you want to compare it to your initial budget. Break out the detail by each line item you assigned a budget to and name that column “Actual Expenses”. This way you can review each line item and see where your money is actually going. This step is shocking to most people. They don’t realize they are spending more on entertainment or allowances than they think. For most, it is the small expenses that add up at the end of the month. For the items on your budget that you don’t pay monthly, i.e. doctor visits, you should have zero spending for the month, but should also have that cash in the bank. For most, it is not in the bank because it disappeared at the local coffee shop or that night out with friends. In the example below, you can see the amount spent in the month was $4,905 out of the monthly budget of $5,500. There should be $595 in the bank to make up the difference, but when you start to look at each line item, you notice the household is over spent for the month. There are items they did not pay that month. If every line item was due in that month, they would be in the red by $265.
|Expenses||Monthly Amount||Actual Expenses||Difference|
|Student Loan 1||150.00||150.00||–|
|Student Loan 2||50.00||50.00||–|
|Car Payment 1||300.00||300.00||–|
|Car Payment 2||350.00||350.00||–|
|Credit Card 1||50.00||50.00||–|
|Credit Card 2||50.00||50.00||–|
|Bank Loan 1||25.00||25.00||–|
|Bank Loan 2||75.00||75.00||–|
|Life Insurance – 1||30.00||30.00||–|
|Life Insurance – 2||45.00||45.00||–|
|Hair / Clothing||75.00||100.00||(25.00)|
|Water / Sewer||80.00||–||80.00|
3: Make some decisions. When analyzing your budget to actual expenses, now is the time you have to decide what you want your money to go toward. Do you have a goal of getting out of debt? Do you want to have cash available when you need heating oil or when your annual car insurance is due? What are your goals? If you don’t have a plan for your money, your money will disappear. It is ok to have long term goals, but when you are starting out, it’s best to start with something small that you can accomplish in a short period of time. Usually people aim to reach a goal within the first year. This allows you to see progress and stay motivated. Maybe your goal is to have $1,000 in an emergency savings account. You already decided to budget $50 a month toward that goal. It will take 20 months to reach $1,000. If you want to reach that goal in 10 months, you need to decide where you can cut spending by $50 a month and direct $100 a month to the emergency savings account. Remember to be honest with yourself and make decisions you feel you can live with. This is not supposed to be painful or feel like you are punishing yourself. Start small and keep it SIMPLE.
4: Tweak the budget, again. Remember, a budget is a living document. It is supposed to change and represent your life. It is ok to change your mind and tweak budget line items. Emergencies may happen before you have the $1,000 saved and you may be forced to tweak line items. Don’t get discouraged. Make the adjustments and start over. That’s the glory of budgeting, you can always start over. You will change your budget every time you pay off debt or acquire new debt. (I am not a fan of debt and prefer to pay off versus get more, but sometimes life happens and it is out of your control.)