This is the core post about budgeting. The How to Budget post. I know some of you might have skipped ahead, but don’t forget to do the pre-budgeting activities first.
Budgeting is very simple. You are deciding before the month begins how your money will be spent. Every dollar earned will be assigned to a category.
Side note. If you are in crisis mode i.e. a lost job, about to face foreclosure or bankruptcy, then you are budgeting to survive. Housing, food, utilities, and transportation come before anything else.
You’ll need to decide how to record your budget. Use what works for you: pad and pen, personal finance software, or a basic spreadsheet. Our family uses a basic excel spreadsheet for our budget, so let’s use that as an example.
Determine Your Income
If you completed the pre-budgeting activities or keep track of your spending then you know what you’ve been making and spending.
Time to write down what money is coming in. Everything. Both Regular and Irregular. Yes, even the $100 your grandmother has sent every birthday since your were 5. Budget every dollar. If you know it’s coming in, put it on paper. For those artists and free lancers out there we’ll talk about budgeting with a 100% irregular income later.
|Types of Income||Regular||Irregular|
|(Monthly Take Home)|
|Carry Over Previous Month||$100|
|Self Employment Income||$500|
|Flood Damage Check||$100|
In our example above we have $3,100 in every month income and $700 in irregular income (meaning it doesn’t happen every month). In total we have a $3,800 family income we can spend on paper.
Budget Your Expenses
It’s time to budget your upcoming expenses for the month. Remember every month will vary, and it will take several months to perfect the budgeting numbers. Don’t be discouraged if your budget doesn’t balance out the first time. It will get easier with practice.
Here is our example of budgeting a $3,800 income.
|ITEM||Monthly Total||Envelope* Total|
|Allocated Savings (Irregular)||250.00|
|Repairs, Oil change||25.00|
|Baby stuff:Diapers, supplies, etc.||50.00|
- The total was $3,800 which equaled the expected income. If they had spend more than $3,800, cuts would have to be made.
- This family didn’t budget for Emergency Savings as they already have an Emergency Fund in place.
- No contributions to retirement were made as they are trying to get out of debt before they resume their retirement savings.
- They are using the Envelope System in the categories with * and thus will get $150 out to spend in those categories. I’ll elaborate more in another post.
- Allocated Savings category is a savings account for annual expenditures they are saving for a little each month. eg. Saving $100 a month for car insurance premiums that are paid every six months. When month six comes along you’ll have that $600 sitting in the bank and won’t be caught by surprise.