Tuesday, July 13, 2010

Budgeting 101--Getting Started

Calculator with documents
Budget--that's an ugly word isn't it? It doesn't have to be though, and over the years I've come to love my budget and would feel lost without it. I like being able to look back on a given month and know exactly where my money went. I haven't experimented with many of the software budgeting programs you can buy, mostly because I'm too cheap, but I've heard good things about You need a Budget, and Quicken. Maybe these programs do save enough time to be worth the price tag, but in my mind, it seems counterintuitive to pay for something that is supposed to save you money.

So what I've done to get around that, is create a free and highly low-tech google spreadsheet. I used google because I'm too cheap to pay for exel on my home computer, and because I can update it anywhere I can sign into my email. This means fewer mistakes and fewer missed entries.

To set up the spreadsheet, just open a google spread sheet, and insert columns for the major areas you spend money. For me, my columns are Food, Alcohol, Misc, Clothes, Gas, Bills. It makes it look like I have a bit of a drinking problem that I have a whole column devoted to alcohol, but it is a regular expense, and one that I can trim heavily if I've gone over in another area. Food includes groceries and eating out, some people put meals they eat out under an entertainment heading, it's all about what works for you. Personally, I built entertainment right into my budget this way because if I allotted myself $50 a month for entertainment, I would feel I have to spend it each time. This way, it looks more like a bonus. I'm not too proud to trick myself.

At the end, I have columns that total my income for the month, as well as my total output. The goal is, obviously, to have the income column be significantly larger than the total output. Further down, not totaled in the total output are savings and student loan payments. These aren't totaled because in my mind they're bonus money. I don't make enough to factor regular student loan payments into my monthly budget, but it does make me feel warm and fuzzy to kick them a bit of money when I can spare it. Same goes with savings, unfortunately.

Once the spreadsheet is set up, it should look something like this:

Each column is labled, and has a box for description of where the money was spent. For example, the food column will have groceries in the first column, and the amount in the second or the name of a restaurant in the first column and the amount spent in the second. This is so you can insert a formula to make the numbers total automatically at the bottom of the screen. That was you can see where you are, budgetwise, at any time of the month.

At the end of each month, I check the total spent against my monthly goal. I try to keep monthly goals pretty static, but if I know that I'm taking a vacation and will be spending more on food and booze than usual, I build that into the budget. If I'm over budget for the month in a certain area, I try to cut back the following month. Some may consider this cheating, but I don't change my amounts enough for it to be that big a deal. Basically, budgeting is keeping yourself accountable, so just like I wouldn't go on a diet, and then eat nothing but ice cream, I'm not going to allot myself $500 a month for food, and then wonder why I'm so broke all the time.

In order to get started, you need to track your spending to see where your money is currently going. You should make a separate spreadsheet like the one above, but without prescribed monthly goals. Then track, honestly, where your money goes over the course of three months. This should give you a fairly good average of how much you spend, and potentially how much you can cut (if that's your goal).

For example, based on my monthly income of $1200, I allot $200 for food, $50 for alcohol, $400 for misc $50 for clothes and $700 for bills and household expenses. Looking at those numbers, I'm already over budget, but I also know that the misc column is where I can cut if I need to. Misc is where things like cleaning supplies, beauty supplies, car insurance, and activities get filed, and I really don't spend $400 on that stuff every month. I leave it at $400 because months where I have a large expense like car insurance, that column goes into the red, and underspending the rest of the time helps me get back to even. Also, knowing that I'm already over budget motivates me to find ways to make extra money (more about that later).

This may be a strange way to do things, but again, find what works for you.

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