We have finally come to the dreaded “B-Word”. Did you really think I could write many more articles without mentioning a budget? Well, it’s time so let’s jump in right now.
Before you are able to chisel out a flawless budget, you will need to gather some crucial information and compile it in a way that you can easily transfer it to your final budget. This process is by far the hardest part of beginning to budget. It’s going to take some time and I can guarantee that you are going to find some skeletons in your financial closet.
As you go along with this exercise, you will be thinking to yourself “this guy is crazy, why do I need to do all of this crap?”. Well, you need to do it to understand where you financial problems lie. You obviously didn’t get into the financial state you are in now by spending less than what you make. By completing this exercise, it will force you to REALLY look into your finances and finally see where the issues are. Pretty soon you may find out that you spend way too much money eating out or that you are paying for services that you no longer use or enjoy.
Before we dive in, make sure you have the following items:
- Pencil and paper
- Copy of all your bills (credit cards, utilities, auto payment, insurance, etc.)
- Most recent pay stubs
- Receipts for your cash expenses that you have complied over at least the last month (you may have to do this before starting the next steps)
- Copy of your last 3 months of bank and credit card statements
- Calendar for the next 3 months (I recommend using Google Calendar if you are able)
Now that you have all these items handy, it’s time to get down and dirty. Please keep in mind that this exercise is for everyone financially involved. In other words, if you are married, BOTH spouses need to be present.
What’s Coming In?
The first step in the process is to review what money comes in on a monthly basis. Chances are good that you either get paid weekly, biweekly, twice a month or monthly. Check your most recent pay stub to find out. Once you know, put all of your paydays on the calendar for the upcoming months. You want to know when the money will hit your bank account.
- Quick Side Note: You may find that if you are paid biweekly, there are some months where you get paid 3 times a month (it happens 2 times a year). For purposes of your budget, only assume that you get paid two times a month. I have a nice tip in mind for the months where that extra paycheck comes into play.
Once you have your calendar all set, get out the paper and pencil and write down the net pay (the amount that is deposited into your account after taxes, etc.) you receive on a monthly basis. If you have income from additional sources (rental income, self-employment, investments, etc.) add these amounts to your paper. Once you have all of the incoming funds written down, total them up and move on to the next section.
Credit Cards & Fixed Expenses
On a clean sheet of paper, list all of your credit cards that have a balance due. It may be wise to look at your credit report (you can get a free one at www.annualcreditreport.com) to make sure you have them all. In the future, we will discuss credit cards and how best to pay them off.
When you have all of the cards listed, include the following additional information:
- Current balance
- Interest rate
- Minimum monthly payment
When you have all of the credit card information down, start listing all of your fixed expenses on another sheet of paper. When you look at the statements, be sure to include the due date of the bill on your calendar. Your fixed expenses should include the following:
- Mortgage or rent
- Loan payments (home equity, auto, student loans, personal, etc.)
- Insurance payments (home, rent, auto, life, health, etc.)
- Subscriptions
- Child care
- Any other expense that know exactly what it will be
Once you have all of your fixed expenses totaled up, move on to the next task.
Variable Expenses
Variable expenses are just that – variable. It can be very difficult to nail down an exact number to budget for on a monthly basis and that requires some intense sleuth work on your part. The plus side to variable expenses is that they are easier to reduce by cutting back, eliminating them, etc.
In order to calculate what you spend on variable expenses, you will need to review your three months of bank and credit card statements and your receipts that you have been collecting for cash expenses. As you begin reviewing each statement line and receipt, begin placing each item into a category. You can make up your own categories or use one of the following:
- Utilities (cable, electricity, water, trash, telephone, cell phones, oil/gas)
- Transportation (gas, car maintenance, parking)
- Medical co-pays and prescriptions
- Dining out
- Groceries
- Clothing
- Education
- Charity
- Gifts
- Personal (alcohol, haircuts, beauty supplies)
- Household goods
- Home repair
- Entertainment (movies, sporting events, gym memberships, etc.)
- Vacations
- Pet care
- Miscellaneous (things that don’t fit anywhere else)
As I mentioned earlier, this could be the section where you really see that you are spending too much money dining out or that you are paying big bucks for the gym membership that you forgot you had. This alone could help you free up a ton of money to use towards getting out of debt or saving more for retirement.
When you have all of your items listed, total them up for each category. Each number will now serve as a guideline and we will use them to start your budget calculations.
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Now that you have completed the hard part of calculation (what you make and spend on a monthly basis), the next part of actually creating a budget should be simple. We will explore that next week.
photo by: 401(K) 2012