Start a Simple Budget, Then Add Expenses

by Kevin on February 28, 2011

You’ve decided to change your financial future, and building a budget is one of the first steps in that new direction. You don’t necessarily need fancy spreadsheets or computer software to set up a budget. And if you’re just getting started it would probably be overwhelming to have to set up something like Mint or Yodlee.

It’s like deciding you want to learn how to play golf and thinking you can play on the pro tour from the first day. It just doesn’t work out, you get frustrated, and you probably quit about 5 minutes after you start.

So today let’s set up a simple budget for you. The more advanced techniques can come later after you’ve mastered the basics. Walk before you run, right? (You can watch a video I put together of a setting up a more advanced budget, too.)

Set Up a Simple Budget

At it’s most basic function a budget should look like this:

Income – Expenses = What’s Left or Savings

Just starting out you might only have a general idea of how much money you spend every month rather than specific numbers. That’s fine. You will learn as you go. Don’t let the frustration of learning a new skill (yes, budgeting is a skill) get to you. Keep it up, keep learning, and keep moving forward.

In fact for first-time budgeters the first month should really be spent just tracking what you normally earn and spend. If you tried to put numbers down in your makeshift budget at the very beginning you would be, at best, guessing. So bring your receipts home. Print off your bank statements. Add everything up and before you know it you’ve got your first number for the expense category.

Your income should be fairly stable. If you are paid a flat salary for your work then your check should be the same every payday. That makes the first step of your budget really easy. (The same is mostly true of hourly earners assuming you received consistent hours every week.)

Once you’ve got your income and expense numbers just do the subtraction. Hopefully you end with a positive number, but even if you get a negative result — don’t give up! You’ve taken a critical first step. Don’t get discouraged.

Add Expenses As You Go

You can get away with one big category for income because most people have 1 or 2 primary sources of income. Having one giant category for expenses just doesn’t work. You’ll track how much you’re spending, but you won’t know where you’re spending it. Knowing where the most money is slipping out of your budget is a great place to start cutting back in order to save money. With one giant pot of expenses you can’t do that.

You’ll learn to add expenses as you go. Most people think of the major expenses like rent or mortgage payment, groceries, and utility bills. But what about haircuts? Toilet paper and cleaning supplies? Memberships or subscriptions to newspapers/magazines?

The expenses that pop up once every few months or once per year can be budget killers if things are tight.  You can go ahead and add some of these 8 expenses you’ll probably forget if they apply to your budget situation. But you’re going to have different budget expense surprises than I am, so just learn to integrate them as they can about. If you get surprised with an expense go ahead and pay it however possible (that’s what emergency funds are for) then add it to your budget as a monthly line item.

Continue this process and you will end up with a fairly robust budget. That’s the long term plan as it removes a bunch of those surprises in the future.

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