budgeting basics – creating a simple budget

budget_cutsCreating a budget is a useful exercise in understanding your money and the second step in gaining control of you finances.

I love budgeting, there’s nothing like a spreadsheet to get the pulse racing (and this is coming from an arts major who thought money was for the capitalist bourgeoisie!)

I have been keeping a budget now for about 9 years in some form or another. From a few scratchings on a piece of paper to a comprehensive excel spreadsheet, my budget has evolved over the years.

Although I know most people hate the idea of keeping a budget, I believe budgeting can be interesting for anyone because it’s relevant to your life, and relevancy is one of the keys to interest.

Before we create a budget, I want to define what I mean by budget.

A budget is a projected forecast of income and expenses based on real world data. It is a tool, a means of achieving financial goals.

A budget:

  • Enables you to see if you are spending more or less than you earn and by how much.
  • Helps you cut expenses and save money.
  • Helps you plan for future bills and expenses.
  • Helps you save for an emergency fund.
  • Helps you plan for future goals, such as investing, or large purchases such as our children’s education, houses, cars or holidays.
  • Helps you get out of debt and stay out of debt.
  • Helps you track our progress.

For a budget to be useful, it has to be based on your actual spending and I find twelve months to be a good timeline.

Because your budget is based on actual spending, your first step is to track your expenses. A budget will never be accurate if it is guess work.

Also, your budget isn’t to be written once and set in stone for twelve months. It is not only ok, but vital that you update and change it as necessary. That way, it remains useful.

So without further ado, after tracking your expenses for a month or so, it is time to turn that information into a budget.

Building your Budget

This exercise can be done on a piece of paper or in a spreadsheet. I like to use a spreadsheet, it makes adding up so much easier. If you’re interested in building a spread sheet budget, free alternatives to Microsoft Excel include Google’s spread sheets (found at www.docs.google.com) or open office.

You could use one of the multitude of personal finance software products available, I recommend using paper or a spreadsheet first, to get a feel for your finances without worrying about the accounting side (like balancing the bank account) that these products offer.

(If you’re new to Excel, I’ve created step by step budgeting tutorials in Excel to help you create your own budget from scratch).

Start by drawing up a grid or spreadsheet with the headings for the months of the year along the top. Down the side of your sheet, write in headings for income, expenses and totals. Use the categories from your tracking expenses exercise as headings and sort your headings into essential and non-essential spending. It should look something like this:

post3example2.1

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Now fill in some numbers. Start with your income and write in your income for each month and total it at the end and at the bottom of the income section.

Next fill in your expenses. Use your tracking money exercise to give you a good idea of how much you spend and on what, use this information to fill in your budget.

Then go through old bills so that you have a good idea of expenses. Don’t forget that expenses are not always the same every month. You may pay for electricity once every three months for example. December is a big time for spending on gifts, as well as the months when there are birthdays in the family. What month is the car insurance due or the car service? What about tax? What months do you receive a tax refund or have to pay tax?

Calculate the totals at the bottom and end of your expenses. After you have filled in your expenses, it should look something like this:

post3example2.1b

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Now that you have filled out your income and expenses, create a line at the bottom to calculate your net cash flow or savings. (how much money flows in (income) less how much money flows out (expenses.) It should look something like this:

 post3example2.1d

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And that’s it! Budget done. I hope you find this exercise as exciting as I do.

Have a look at the totals for each month. Are you spending less than you earn? How much do you predict to have in savings at the end of the year? What is the overall picture?

This simple budget will give you a detailed idea about your current spending habits and the results of those habits.

But a budget isn’t just about how we are spending now. It’s a tool to use to ensure we are spending less than we earn to achieving our financial goals. See the next posts in the series to see how you use your budget.

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