By Our Finance Contributor, Olivia Sielaff
Now that you’ve had a little practice with tracking your expenses, and perhaps are starting to see a pattern to your spending, it’s time for the second step: creating a monthly budget.
Budgeting is like a road map for your money. Remember in my last article when we likened it to a GPS? You’re the navigator, and your money can either help or hinder you from getting to your destination. Simply put – budgeting is telling your money where to go.
How often do we tell our money where to go? Usually the reverse happens and we go wherever our money takes us until we run out. But with budgeting you’re one step ahead of your money – you have a plan. Having a plan is so important in many aspects of our lives. How do explorers scale Mt. Everest without a plan? How do farmers grow crops without a plan? How do we get to Heaven without a plan? The same goes for our money. We can’t save and spend wisely without a plan.
So, here’s how to start planning and create a road map for your money.
1. Write it down
With paper and pencil, on an Excel document, through a mobile app – any of these ways work. Just make sure you have a system to document everything and serve as a reminder for you throughout the month to keep you on track.
Try Dave Ramsey’s super-simple monthly cash flow budget sheet. Or set up your budget for free on Mint.com and it will send you email and text reminders when you’ve gone over budget in certain categories. If syncing your bank account with an app like Mint isn’t your thing, try apps such as Spendee (free), Wally (free), or Budgt ($.199) in which you manually track and organize your expenses.
2. Divide into categories
Budgeting doesn’t simply mean setting aside a couple hundred dollars each month for expenses; it’s more detailed and targeted. Divide your budget into bite-sized categories, which are unique to your expenses and situation. This is where tracking your income and expenses comes in handy because now you have an idea of where you’ve been spending your money.
Some common categories to divide up your budget are transportation/gas, entertainment, savings, health and beauty, groceries/eating out, bill payments, pocket money, donations, gifts, etc. Most of the categories you have will represent consistent expenses each month, like bill payments and transportation. These are known as Fixed Expenses – ones you can’t skimp on.
But you can also budget for anything else you’d like or that might come up. These are called Discretionary Expenses. Maybe you haven’t treated yourself to some new clothes in awhile, so you can budget $50 for a shopping spree next month. Or, you know that your friend’s wedding is in two months so you can budget to start saving $100 for a gift and transportation. You can also make your categories as specific as you like – for example, shoes could certainly qualify as a category.
The idea behind categorizing is to get you to think ahead at what the upcoming month’s expenses are going to be like. Even setting aside pocket money for really unexpected surprises is still considered part of the budget.
3. Set the budget
Now it’s time to create a budget for each category – in other words, set a limit for the maximum amount you can spend on a certain category that month. Usually you can determine this based on your average spending habits in each category. For example, I spend about $70 a month on gas. But if I know I’m making a road trip next month, I’ll budget $100. This way I won’t be caught off guard because I’ve anticipated spending more money on gas that month.
I like to use what’s called a zero-based budget since it guarantees that I’ll allot a place for all of my moola each month. Zero-based budgeting simply means taking your total expected monthly income and dividing it throughout each category until you have zero dollars left to divide. Here’s a simplified example, but say my income was $500 each month. I’ll budget $100 for each of these five categories: transportation, food, savings, tithes, and coffee. With this kind of budget, I’m telling each of my dollars exactly where to go. There’s no extra cash floating around that will “disappear” without my knowing. (This kind of budget also shows that I drink way too much coffee).
The great thing about zero-based budgeting is that if you don’t spend all the money you anticipated in one category you can either save it for next month, or transfer it to a different category that month. This system makes sure that you’re only spending the money that you do have.
It usually takes a few months of experimenting and tweaking to figure out the best budget that works for you. But having a plan, a roadmap, for your money is the first and most important step to keeping you on track.
Remember: You are in control of your money when budgeting. Give each dollar a destination and follow the roadmap you’ve set.