1| You have Income
2| You have Expenses
3| You do or would like to budget
4| You have an Accountability Partner
1| Track your spending
- There is no right or wrong way to track your expenses. You can do it by hand, on a spread sheet or with a fancy app. You can look back through your statements or you can collect receipts over the next couple months. Whatever will give you the best understanding on where you are spending your money. One of the biggest budget killers is not incorporating those expenses that don't occur every month: Taxes, vehicle registration, auto maintenance, gifts, etc. No matter what method you use to estimate your expenses, think back over the course of last year and then for the coming year and try to account for all of the one off expenses.
2| Group your Spending into Categories & Subcategories
- Once you have your expenses identified, break them down by classification by first establishing Categories and then breaking the categories into Sub-Categories..There is no right or wrong way to do this either. Whatever will make the most sense to you. Examples of Categories would be: Housing, Transportation, Food, Personal Care, etc. Examples of Sub-Categories would be: Mortgage, Electricity, Fuel, Groceries, Dining Out, Clothing, Hair Cuts, etc.
3| Identify the Subcategories as either Non-Discretionary or Discretionary
- This step is done for multiple reasons and is very important. Non-Discretionary expenses are fundamental to you having shelter, food and basic care. Discretionary expenses are based on your desired lifestyle, you can survive without them.
4| Subtract your Spending from your Income
- This step is as simple as it sounds. Add up your household income and subtract your expenses.
5| Adjust your Spending to the result of Step 4 is ZERO.
- Step 4 will most likely result in a positive or negative number. You need it to equal zero. No matter what the result, review your expenses to make sure you can't reduce them. You don't want to spend money haphazardly, even if you have a surplus. From time to time it will pay to contact the companies you do business with to make sure you are getting the best deal that they are offering. It is also a good habit to review your services and make sure you are not paying for things that you no longer use.
- If your calculation resulted in a negative balance, you need to look at cutting back. You have already identified your discretionary and non-discretionary expenses. The quickest result is to cut back on your Discretionary expenses, but don't overlook your Non-Discretionary expenses. Do you spend too much on groceries? Can you downsize your home? Do you need to restructure your debt? The possibilities are endless. Bottom line, you can't spend more than you make. Actually you can for a short period of time, but it will eventually catch up with you.
- If your calculation ended up in a surplus, you need to direct the excess to predetermined locations. Review your goals. If your main goal is to reduce debt, pay more towards the principal. If your trying to build your Foundation Fund, direct excess to your savings account. You have many possibilities, just make sure what you decided coordinates with your goals.
6| Put your budget into action
- Once you have created your budget, put it into action. You have to stick to it for it to work. Again, there is no right or wrong way to track it, just track it. You can do it by hand, with a spreadsheet or a fancy app.
7| Repeat steps 1-6 as needed
- Life happens. Incomes increase, incomes decrease, expenses grow and shrink. When change happens, review your budget and make adjustments when appropriate.
Best of luck and Happy Budgeting.