Now that you have prepared all of the necessary information to start your budget, it’s time to put it to paper. Compared to the last task, this one is a little easier. All you need to do is plug in the numbers and see if they work.
If the numbers do not work, it may get a little time intensive. However, getting your budget set early on will do wonders for you in the future.
Annual Spending Plan
In my opinion, the first step you should take when preparing a budget is to create an annual spending plan. My wife and I do this on a yearly basis and it gives us a very clear picture of the upcoming 12 months. For this purpose, I have created a worksheet that I recommend you use.
Download: Annual Spending Plan Worksheet (30)
Note: The download requires Microsoft Excel. However, you can save it and then open it in Google Docs if you do not own Excel. You will need to be careful not to overwrite the formulas if using Google Docs as I could not lock the cells like I am able to with Excel.
The worksheet is fairly self-explanatory, but you should know a few tips before getting started. The first step would be to add your monthly net income to the tab labeled “Income” in the bottom left hand corner of the worksheet. When you have this information input, move on to the “Budget” tab. As you will see on the new tab, the income information that you put in will have flowed over.
Now that you are on the budget tab, you can start entering in the information that you compiled during the beginning stages of the budgeting process. I suggest that you enter in the exact amounts that you compiled as they can be (and surely will need to be) changed later. If you need to add a line for a category that isn’t listed, just add a new row by right-clicking in between the two rows that you would like to add a new one.
Once you have all of the expenses in the worksheet, it should total up all of the income and expenses. The next step will be to look at the bottom of the worksheet (in the yellow area) to see if there is any money left over for additional debt payments or savings. If there is, you can then use that extra money to make additional payments on your debts or save it for retirement, a house, etc.
If you find that there is no extra money left over at the end of the month (i.e. you are spending more than you make and the number is red), this is the perfect time to think about items that can be cut or reduced on a monthly basis. For example, if you are spending $400 a month on dining out, you may decide to eat more at home. This may decrease your dining out budget by $300 but increase your grocery budget by $100 thus netting you with an additional $200. As you will find out, it may take some time to get things where you want them. However, the worksheet works nicely by showing you what happens when you edit things slightly.
Infrequent Expenses
As you know, there are some expenses out there that only occur every few months or annually. For example, you typically pay your auto insurance every six months. If you have infrequent expenses such as these, I recommend that you fund the payment a few months ahead of time. For example, my wife and I fund our auto insurance during the three months ahead of the payment. This means that we are able to fund the payment a little easier and are not surprised by the large bill when it hits.
Working With Your Monthly Budget
Now that you have a clear picture of what your annual budget looks like on paper, it’s time to work on how you will monitor it monthly. There are several options out there to monitor your budget and we will take a quick look at a few options. An important thing to remember is that you need to do what works for you. If putting cash in envelopes labeled with the budget category works for you, then do it.
The first few options are very basic in nature. One thing to keep in mind about these is that it requires you to input all of the information yourself. In other words, if you spend $50 at the grocery store, you will need to deduct it from your budget manually.
Paper and Pencil
The first option is to create your budget with a paper and pencil on a monthly basis. This may seem time intensive, and it is. However, I see one major plus to completing your budget this way: it forces you to sit down and do it each month. By sitting down by yourself or with your spouse on a monthly basis, you are forced to review last month as well as plan for this month. Doing this causes you to be more accountable and can increase your likelihood of success.
Excel Spreadsheet
Another option is to use an Excel spreadsheet just like what was used for the annual spending plan. If you do not have Excel, you can create a free spreadsheet by using Google Docs and monitoring it on a monthly basis. Google Docs also has several budgeting templates for you to try out. If you have some basic knowledge of Excel, this can be quite a useful way to monitor your budget as you are able to tweak it to however you desire.
Online Budgeting Software
If I had to guess, I would say that the majority of families with a budget utilize some type of software. Because of this, I am going to go over a few of the popular options that are out there.
Mint.com
Mint is a free personal finance software package from Intuit (the makers of TurboTax) that aggregates all of your financial accounts in one place. You can easily add your bank accounts, credit cards, investments, etc. to the software and it will automatically download your transactions on a daily basis.
Mint also has a budgeting feature that is fairly basic in nature. All you do is add the categories from your budget into their budgeting section and add your spending limits. When transactions are downloaded by the program, they are automatically assigned a category and the spending is deducted from your budget category. The only hiccup to this is that sometimes Mint cannot recognize certain expenses as what they truly are. For example, sometimes when we visit 7 Eleven and grab a couple of sodas, Mint thinks that we bought gas. Therefore, we need to go in and edit the transaction to correctly show the category that the budget should use. It’s kind of a pain, but it still can be easier than a pencil and paper.
For an overview of Mint.com, I recommend going to their homepage and clicking on “How It Works” from the menu.
Mvelopes
Mvelopes.com is an online budgeting program that my wife and I use. There is a free version as well as a premium version. My wife and I use the premium version due to the number of accounts that we have (you are limited with the free version).
Mvelopes focuses on the envelope system of budgeting in an electronic form. The envelope system is simple in the fact that you are required to place cash in an envelope for certain categories. Once the cash is gone from that envelope, you cannot spend any more in that category. For example, if you have a $400 grocery budget, you put $400 cash in an envelope and take it with you when you shop. Once the funds run out in the envelope, you cannot spend more on groceries. This method forces you to focus on the cash that you have available and find ways to stretch that money over the month.
Mvelopes puts the envelope system on an electronic platform. You create “envelopes” with the program and fund them electronically by connecting your checking account. You then spend as you normally would with your debit card and deduct the expense from the desired envelope when the transaction clears. It’s actually really great and easy to complete. I recommend it highly!
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Now that you have everything ready to go, it’s time to start your budgeting future. Personally, it took us a few months to get the kinks out of our functioning budget and I can guarantee that yours will not work perfectly starting out either. It takes dedication and hard work to make a budget function properly. However, you will find that the rewards greatly outweigh the costs.
By starting a budget, you are certainly Walking to Wealth as you will see increased debt repayment and increased savings! Contact me if you have any questions regarding setting up your budget!
photo by: kenteegardin