How to Set Up your First Budget
Your first budget can be very intimidating. If you’ve never attempted one before, it’s often overwhelming just figuring out where to begin. But it doesn’t have to be that way. The budgeting process is actually pretty simple in theory. The good news is, it’s simple in practice too.
Before we do anything else, let’s get ourselves in the right frame of mind. Sometimes it seems like we defeat ourselves before we even start. Having the right attitude makes all the difference in the world when doing a successful budget.
For many people, the word “budget” has a negative feeling to it. Some people relate it to a restrictive thing that doesn’t let them breathe. Others use it as a control mechanism over their families. The truth is, it shouldn’t be either of these things. All too often we associate negativity with budgets and that’s a bad thing. So let’s do this: If the idea of doing a budget sends you into a downward spiral of negativity, let’s call it something else. How about a “spending plan” or a “cash flow plan”? Don’t those sound better than budget? Call it whatever you want, as long as it puts you in the right frame of mind to get this done!
Using a Budgeting Template
When you’re getting started, it may be helpful to use a pre-made budget sheet or template. There are many budget forms and templates out there that you can use. We personally use this free budget form to manage our finances but you should use what makes sense to you and doesn’t scare you away. In fact, you may not even want to use a template at all. There have been times when a yellow pad has worked just fine for me, providing I remembered all my expense categories.
Determine your Income
How much money do you have to work with? It’s hard to tell your money how to work for you if you don’t even know how much you have in the first place. That’s why I like to start by writing down my income. Include all income sources. I also like to work with my take home pay, not the gross pay. That lets me work with and plan for what I’ll actually see in my bank account. I also like to work specifically with one month at a time and focus on the income that will hit my account in the particular month that I’m budgeting for.
Spend Money on Paper
Once you identify how much money you’ll have coming into your bank account in the coming month, you can start planning what to do with that income. Start writing down your expenses on paper so you can get them in front of you in black and white. It may be easiest to work with the regular expenses you have, like rent/mortgage, insurance, taxes, phone or cable bill, etc. Next write down your monthly irregular expenses. These are things that happen every month but are a different amount, like your utilities.
Now is a good time to identify all the ankle-biter expenses that sneak up on you every year. Do you give gifts for Christmas? Do you license your vehicle(s) at the same time every year? Do you have insurance bills that come every six months? Identify those expenses and plan to set aside some money each month for them so they don’t destroy your budget when it’s time to pay for them.
Finally, write down any exceptions to the norm. What is happening this month that doesn’t happen in normal months? If you don’t include those expenses in your plan, the budget won’t balance. Don’t forget to include savings, investments, and extra money for debt repayment in the list of expenses. These are an important part of the budget, and too many people ignore these categories until it’s too late.
Balance the Budget
Now that you have your income and expenses identified and written down, it’s time to balance the budget. The goal is to have your income and your expenses even out. If those two numbers are equal for the month, you have a good cash flow plan, otherwise known as a balanced budget.
In other words, when you add up your total expenses for the month and subtract them from your income, you want the difference to be zero. That means you’ve accounted for every dollar of your income and give each dollar a purpose within your plan.
If your expenses are higher than your income, that can be a pretty scary situation. Don’t let panic set in. Take a moment to relax and calm down, then go back through the budget to find places where you can reduce your expenses. This is a hard step but it can also be very liberating to take control of your spending habits.
If your income is higher than your expenses, that means you’ll have money left over (as long as you stick to the budget) at the end of the month. Before that money burns a hole in your pocket, make sure you go back into the budget and find a place to put that money. Put it in savings, pay off some debt, or whatever you want. Just make sure you have a plan for that extra money so it doesn’t disappear!
But How Much Should I Budget For?
When working with people on their first budget, I often see them get overwhelmed with determining how much to budget for each category. They’ve never tracked their spending and they have no idea how much they typically spend on things like groceries, restaurants, or gasoline. They don’t have an idea how much is an appropriate amount either. In many cases, this can cause a sort of paralysis that keeps them from moving forward. As a result, the budget never gets done at all and they give up.
If this is you, you’re not alone. Don’t be embarrassed. Don’t be intimidated. It’s not that bad.
To get an idea of how much to budget for, you can look at your bank statements for previous months. Try to identify the main categories and break your transactions into those budget categories. If that doesn’t help, you can keep your receipts for a month and see where your money is going. That will give you a good idea of how much to plan for each spending category.
The Iterative Budget Process
If all else fails, just give it your best guess. That’s right. Just guess. I hate to tell you this up front, but your budget is going to fail in the first month. Yep, it will FAIL. Nobody is so good that they’re going to predict exactly how much gasoline or electricity they’re going to consume next month. So the budget isn’t going to be exactly right.
But that’s a good thing. The budgeting process is iterative in nature. Your first one doesn’t have to be perfect. It just has to be written out and attempted. The fun part comes when you add up all your receipts for the month and see how you did. You’re going to mess up. Some categories will be overspent. Some will be underspent. And some you might actually get just right.
Now here’s the trick: Don’t let your mistakes get to you and become an excuse to quit. You didn’t learn to ride your bike without falling off a few times. This is no different. Identify where your budget was wrong and make changes for the next month. You’ll make mistakes in the next month’s budget too, but not as many. Learn from those mistakes and get a little better for the following month.
After three or four months of working your budget, you’ll begin to dial in your expenses and have a pretty good idea of how much to budget for each category. Maintain this progress and the mindset of continuously improving, and you’ll be a budget superstar before you know it!