How To Build A Budget Series Step 1: Tracking Income and Monthly Expenses
Having a plan for your money is a must if you are to successfully manage your finances. A general contractor wouldn’t dream of building a home without blueprints, an engineer wouldn’t think of building a new computer chip without a schematic, and none of us should walk through everyday life without a plan for our money. Call it a budget, a spending plan, or one of many other names, but you need one.
Everyone should have a plan for their money.
This week on CleverDude I’m going to help you create just such a plan. I’m going to start at the ground level and layout a step by step process to help a person get a grip on their income, their spending, and to identify what might need to change. This is going to be a multi-post effort, but I urge readers to fully absorb all the posts on this subject before taking action as some of the steps could run in parallel. Also, change is iterative. What I mean by that is, doing everything at once may be difficult. Implement things over time if you have to, gradually moving towards a permanent and structured way of handling your finances. Finally, I want to mention that this is one of an infinite ways to build a plan for your money. You can use this as a guide to get started, then tweak and experiment until you find sometihng that works perfectly for you. Let’s get started!
Many people are visual creatures; they can understand things better if they can see it. For this exercise, you should consider tracking the information on a calendar, whether it’s your common paper kind, or a whiteboard calendar. I use a whiteboard, as it’s usually bigger, and changes can easily be made.
I’d be surprised if anyone didn’t know how often they get paid, whether it’s weekly, biweekly, or bimonthly. But people struggling with their finances may not fully understand what their income looks like from a monthly perspective.
How many paychecks a person can get in a month can vary based upon how many days are in a month, and on what day of the week the month starts. For example, people who are paid bimonthly always get two paychecks, but someone who gets paid every two weeks may get 2 OR 3 paychecks in a month. Additionally, dual income families, or people with multiple jobs may have a more complicated income stream.
The goal here is to track when your income arrives. If you can determine when all your income will hit your bank account, write the amounts in green on the corresponding dates on the calendar. If your paychecks are not the same each time, look at your last pay stubs and take an average or representative amount. Since you’ll look at this calendar many times over the month, things will be updated as data can be determined more accurately. If you cannot determine when all your income will show up, add it to the calendar as it happens during the month. Our goal here is to have an accurate picture of your income at the end of the month.
While many people may know (or at least think they know) how their income stream looks, ask someone to give a detailed list of what monthly expenses they have, how much they are, and when they’re due and you’ll likely get a lot of blank stares. Many people operate under a system of paying bills as they show up in the mail, or by the date on the payment coupon. Using the same calendar, as bills come in the mail write the who the bill is from and the amount in red on the date it’s due. Our goal for this part of the exercise is to create a clear picture of how much your expenses are, and when they’re due.
If you were able to do both activities just by sitting down and sifting through information you already had, great. Otherwise, build the information as the month progresses. Once you have a complete month’s worth of data, do the following:
- Add up all your income
- Add up all your expenses
- Subtract expenses from income
The result from step three is the amount of money you have left after you pay all your monthly bills. If that number is negative, you need to either increase your income, decrease your expenses, or most likely some of each.
This data can be used to select a budget cycle duration which will help you break the managing of your finances into smaller logical pieces. For example, while my wife and I have income from her two part-time jobs as well as my online activities, the vast majority of our income is from my job as a software engineer. I get paid from that job bimonthly. Therefore, our budget cycle is on a bimonthly basis. We split our bills and income into first half of the month and second half of the month. By looking at your calendar, and concentrating on the frequency of income, you should be able to select a budget cycle duration.
Budget Cycle Balancing
For each budget cycle I add up our income and expenses. If one month has a greater amount of bills than another I either have to:
- Save some money from one cycle to cover the other
- Call who the bills are from (utilities, car payments, etc) to inquire how I can change the due date
Performing these exercises will help you accomplish the following goals:
- create a clear picture of you income stream
- know exactly when all bills are due
- find out how your income compares to your monthly expenses
- select a budget cycle duration
- balance your monthly bills if necessary
Once you’ve completed this step, you’ll be ready to move on to the next subject, which will be the every day spending plan for normal household operation. Stop back on Wednesday!
Brought to you courtesy of Brock