This is the third part in a series of posts about creating a budget. In the previous two posts we have:
- Created a calendar that showed our income stream vs. our monthly expenses, how to calculate what is left over, and discussed defining a budget cycle duration.
- Explored the world of tracking our purchases including categorizing and analyzing how we spend our money.
Thus far, our work as purely been information gathering and analyzing how we currently act financially. You may have learned something about your finances that you didn’t previously know. For example, if your expenses plus your spending exceeds your income then you’re accumulating debt. The revelation that you’re overspending signals that a change is needed. Maybe you’ve noticed you’re spending a lot more than you thought on dining out. You might decide that if you cut down on dining out you could save money and go on that vacation you’ve been dreaming about.
You now have a financial map of how you’re currently behaving financially. Having this map is more important than just being able to explain where your money is going. It also allows you to make changes and to reshape your behavior to match your financial goals. All you need to do is create a budget.
A budget allows you to shape your financial behavior, resulting in the ability to meet your financial goals.
The first, and one of the hardest steps to take is move from a reactive to a proactive perspective. Now that I’ve tracked my income and monthly expenses, I can accurately map them out for upcoming budget cycles. While there may be some variance, it should be very much the same. Before the beginning of each budget cycle I use the previous month or budget cycle to map out on a calendar my family’s income stream and monthly expenses as described in the first post in this series. I also calculate the amount left over so I know how much money I have to deal with for other purchases.
Now that I’ve got the foundation laid, I can move on to day to day living.
Budgeting The Essentials
After income and monthly expenses have been taken care of, it’s time to get down to the business of daily life. After monthly bills, the next expenditures I tackle are the things I need each and every week. For me, it breaks down like this:
- Groceries and household goods: $150 per week
- Gasoline : $50 per week
Thus, for as many weeks as there are in a budget cycle, I need to subtract $200 from the amount left over after monthly expenses.
Pay Yourself (Almost) First
You may have heard the term, â€œPay yourself first.â€ The concept is, put money into savings before you spend any of your income. I operate on a slightly different model in that I take care of the things that HAVE to be paid, then I pay my savings account. Monthly bills, groceries and gas are things I absolutely need to keep life moving in a positive direction. After that, there is predetermined amount that is put into our savings / emergency fund.
Whether it’s a birthday gift for grandma or school pictures for a child, there are going to be things during a budget cycle that you will need funds for. The key to a successful budget is to identify them proactively so they can be accounted for in the spending plan BEFORE you spend all your discretionary funds.
The very last bucket is entertainment. Whatever is left after all the other subtractions is what we can use for entertainment. My wife and I discuss what we want to do with the rest of our money. If I have poker night with the guys during this budget cycle, then I’ll want to allocate funds to do so. If she wants to visit the salon, we allocate funds for that too. The key here is that we have to fit what we plan to spend inside the constraints of the funds available. When the money is gone, we’re done doing things.
It works best for my wife and I to go through this process together so that we’re on the same page when it comes to our finances. However, it’s absolutely essential to so to identify all the extra expenses during a budget cycle and to plan discretionary spending accounting for the wants of both people involved. The relationship has two people, and we both deserve to get enjoyment out of our income.
The Asset Of Time
This process is difficult in the beginning. It’s hard to remember when all the bills are due, what the expenses coming up are, and how to figure out what to do with limited resources. However, it will get easier over time as you will gain experience and you will have the data of previous budget cycles to draw upon. For this reason, I keep my spending tracker, and my income/expense calendars tucked away for future reference. Using past data as reference and a template will help you be more prepared and successful in the future.
Now that we’ve talked about proactively creating a spending plan for each billing cycle, we’ve got just one more topic I’d like to cover. Stop back on Monday to talk about what a person should do if they run out of funds before they get all the way through all the budgeting buckets.
Have you been enjoying the Build A Budget series? Do you have any tips or experiences to share?
Brought to you courtesy of Brock