Drafting your budget.

In my last post regarding "Money Matters" I challenged you to sit down and look at your past three months of financial records. If you have completed this step, then WAY TO GO! You are now ready to move on to the next step, creating your budget. If you have not looked back at your history I would encourage you STOP and read my last post before going any further.

Understanding what your history is telling you
Now that you have in front of you your financial history for the past three months, let's break it all down so we can build it back up and better your future!   I made a sample sheet for you in order to help you follow along. Don't worry, this isn't MY actual numbers for my life. I'm not ready to get THAT personal :). But I do want my readers to be able to compare their work to something else. I did base the categories a little on my life. I'm single so I don't have a dual income in my house and I have no children to feed either so you wont see any line items for diapers or soccer camp. Ive tried to make this pretty basic so more readers can follow.  To make this even more basic, all of my numbers  numbers are rounded to the nearest 10 dollars. Your history, if at all possible, should be down to the penny if you can get it there.

 The first three columns are my sample totals for the past three months; Feb, Jan, and December.  In each column you should add your income and then subtract your expenses. This is how much money you have left yourself at the end of each month. As you can see from my example, each month's expenses are higher that the income. Nothing is left? The first column was over by $250 and look at the last column at $1102 over! That was December!! This is a perfect example of a history that is out of control and needs a change. If you history shows you have money left over, then way to go, but I prefer you not have money left over either. We need to get income to = expenses. How?

Because we are not robots and we don't have the exact same routine of spending and earning every day, week or month, we need to get a better idea of about how much we spend on average each month.  If we can figure this average we can budget this new amount into each line item to help us better prepare for those rare months. For instance, you can see this sample has a much higher expense in the "gifts" category in December. $0 in January and February, then $350 in December.  I personally don't spend the exact same amount of money on gifts for people each month, but when the Holidays roll around, BOOM, the expenses are out of control.  Think about other expenses you have that don't come around every month; your car tag expense, the 6 month dentist visit, buying school supplies at the start of the year, etc. I like to average my expenses across a 12 month year so I don't have to try and do the math each month for those expenses that aren't as common.  See below...

 It may seem basic, but add up the 3 months for each row and divide it by three. This average you have calculated is the amount you typically spend over the course of the year each month. Based on this average expense, you know should have a better idea of how much you actually need to prepare yourself to save on a monthly basis for the months ahead so you are prepared for those rare annual expenses. For instance, the gifts. If on average I spend $117, then I need to budget and save $117. I wont spend that every month, but when the Holidays come around, I will be ready. Keep in mind that 3 months may not be enough of a history for all categories. You may have to continue to monitor your spending over the next 3 - 6 months to get a better "average" for some categories and adjust your budget as necessary.  So you have your averages. Now what?

For those that have been over spending
Now you have to look at your past and see how to set your budget for the future so you stop this over spending. You have got to get your income to equal your expenses. That is right, EQUAL. If you are looking at a history where you are over spending,  you need to go line item by line item to see where you need to either A) make more money under income or B) cut spending in your expenses.

Here's some questions to ask yourself to get your started.

1) Am I spending too much in a category?
2) Is it possible for me to cut back?
3) If I budget myself $xx.xx, will I be prepared for the unexpected?
4) Am I missing any categories?


For those of you that always have money left over
If you have money left over then you are doing very well and already on the right track. However, when making a budget I never recommend to anticipate having money left over. Again, I said to make your income = expenses.   Since you have money left over, is there a line item where you can up your budget?  Is there a new category you should put into your budget? Here are some thoughts?

1) Do you have a category for Emergencies?
2) Do you have a category for Retirement?
2) What about savings for goals down the road that may come more than a year from now such as a child's college fund, a new car, or a house renovation?


In both circumstances list above, this is where things will start to get personal and very REAL.  I can't tell you how much money you should earn, or save, or spend on every little thing in your life in order to make your income = expense. However, I do hope that you do your best to try to budget yourself appropriately so that you can get there. So have at it, dig deep, get personal and real and honest with yourself (and anyone else involved in the household's finances) and set your numbers. Based on what you have spent in the past and what you should realistically spend in the future, find those numbers to make your INCOME=EXPENSES.

Nothing you do during this budgeting draft is permanent. You can continue to make changes as you go and I hope to continue to encourage you and offer advice as you work through this process. 

My next post on "Money Matters" will be gearing you away from all this manual addition and (zzzzzzzzzzzzzzz.....) Excel spreadsheets. I'm going to show you some user friendly websites that will begin to make this process soooooooo much easier! 

But first, well.... I already have a "Money Doesn't Matter" post all geared up and ready to go out tomorrow!