I'll start by relaying a discussion I had with some friends about budgeting a few years ago. My friends were a relatively newly married couple in their 30s. One is a coworker of mine, and the other is a registered nurse. My coworker was trying to prove his wife wrong by asking me if I budgeted to the penny, or if I just put a buffer on the actual costs in case I went over. He wasn't very happy when I told him that I budgeted to the penny, (for fixed costs). In my opinion, if you know what something costs, and it's always does, or should, cost the same, you budget for that cost in order to avoid leaving money unaccounted for.
I'll start by saying that budgeting is easy, if you already know where you're money is going. If you've been avoiding some of that information, for one reason or another, it's going to take a little more effort. Your first step is pretty simple for most people, figure out how much money you make. This can be a challenge for those self-employed, or those who work short term, temporary, or contract jobs. But the idea here is to figure out what you can reasonably expect to have available in your bank account each month. Make sure to include all income sources.
Once you've figured out how much money is coming in, and you've put it on the top of your new budgeting spreadsheet, it's time to figure out what's going out. Most people will tell you to start gathering up your paper bills and stack them up, going through them one by one. As someone who's grown up with technology, let me suggest an alternative. Login to your online banking and credit card accounts and go item by item to find those recurring payments. Things like TV, internet, rent or mortgage, property taxes, etc. Start making a new line for each of your monthly expenses. If some of these expenses are variable, for example overages on your cell phone, maybe start by taking a look at my recommendations HERE.
Now that your "fixed expenses" are accounted for, here comes the hard part. You need to analyze your own life, and figure out where the rest of your money goes in a given month. How much do you spend on food, clothes, entertainment, etc. These costs are considered variable expenses as they can vary somewhat from month to month. It's important to be realistic, and skimming through your online banking can give you a better idea of where your money is going. This is assuming of course that you're following my advice on using your credit cards, which you can find HERE. You'll find that these numbers may not be accurate right away, but keep an eye on your spending, and you'll get it in the right ball park very quickly.
For those excel experts out there, set up your spreadsheet to add together all of your sources of income, subtract all of your fixed and variable expenses, and leave the total about 10 lines lower than your last expense, (you'll see why in a minute). Now, is the number positive or negative? If the number is negative, it's time to take a look at what your priorities are, like I did HERE. Your choices are pretty simple in the case of a negative number, earn more, or spend less. If you're number is positive, which it should be at this point, you now get to decide how to best "spend" that excess money every month.
Now this is where I expect to get some flack. Unlike most people, this is the end of my formal budgeting exercise. I don't maintain a separate spreadsheet with all of my expenses to carefully watch where my money actually goes in reality. Instead, I regularly review my bank account balance and my budget to ensure that my spending is in line with my budget. If it's not, then I try and find ways to bring the two into agreement again. This continual review is the biggest part of my regular financial checkup, which I'll be writing about a little later.
Let me know how your budget turned out. Was the process as simple and painless as I hope? Is there anything I missed? What was the biggest surprise for you? Comment below.
