Creating a budget can seem like an overwhelming task. Where do I start? How should I categorize items? How can I determine my spending? There are so many questions that it can make you not want to start the process! That is where this blog, and I, come in. My goal is to make this process as easy as possible for you. Your goal, with regards to this post, is to compile the information in order to begin preparing your budget.
Knowing Your Why
The first step in creating a successful budget is what we discussed in the previous article “The Debt Mindset“. Why are you creating a budget? What are your goals? Without a goal, you will either fail to follow your budget or not make one all together.
There are many reasons you could want to start this journey. Paying off your debts, though the main focus of this blog, does not need to be that reason. You could want to start to build a safety net in your bank account or start finding money to begin investing. What matters is finding the reason that speaks to you to ensure you are successful in achieving your dreams.
Determining Current Expense Levels
After you have determined why you want to create your budget, it is time to start drilling into your numbers. In order to create a realistic budget, you need to know what you currently spend your money on. Many people think that tracking your expenses for 30 days is what you need to do to determine your spending. I believe a bigger sample is needed to get a true sense of what you spend in a month. I would recommend looking at the spending of your last 90 days in order to get a solid base of your spending habits. Breaking these 90 days into three months and then averaging them out will provide a far superior picture than just looking at the last month of expenses.
How do you accomplish this? Since most things can now be accessed online, it is surprisingly easy! All you need to do is access your bank account or credit card account online and download your transaction report right to Microsoft Excel. Once downloaded, assign a category to each transaction then add them up by category. If you looked at the last 90 days of transactions, divide each category by 3 for the 3 months in 90 days and bam!, you have an average of your spending habits by category!
Lets take a more in-depth look at the process together.
Expense Categories
Once you have all of your transactions downloaded and in one place, it is time to determine your expense categories. It is up to you on how detailed you want to be. At the bottom of this article I have included a budget template spreadsheet for you to use to illustrate potential applicable categories. Feel free to add or take away any lines that do or do not apply to you. Some common expense categories include:
- Groceries
- Restaurants
- Mortgage/Rent
- Utilities
- Gas
- Car Payment
- Student Loan Payment
- Child Care
In regards to the number of expense categories, the more you have is not necessarily better. No, you do not want to only have 5 categories which would make it impossible to analyze, but having countless categories will have the same effect. Groceries are groceries, food, toiletries, paper products, no matter from what store you purchased them from. You can group all of your pet expenses into one or two categories, if you wanted to separate veterinary expenses from your day-to-day pet costs such as food and toys, but more than two would be excessive. Your goal is to be able to analyze the information you put together, which will be discussed in the following post about inputting the compiled information into a summarized budget.
How About Credit Card Payments?
You can see above and in the template, there is no category called “Credit Card Payment”. This is intentional. All of your expenses from your credit card should be separated out into the other categories. The only expense from your credit card that you may have and is included in the template is any interest that accrues on your credit card balance each month.
Large, One-Time Expenses
What about one-off expenses? When my wife and I were compiling our expenses for the first time, we had one large expense related to purchasing our fur-baby Luna. Even though my wife would love to, that is not something we are typically spending money on each month. We love our two girls but they are plenty. If you have an expense like that, you can leave it out of your budget calculation but be careful. It can be a slippery slope leaving expenses out of your budget. Money you spends on gifts, for example, may seem like one-off expenses but be real with yourself. Gifts are purchased throughout they year for many people. Those gifts are to be included as a separate category in your budget or else you run the risk of blowing your budget completely.
Categorizing Your Expenses
So you’ve downloaded your expenses from your bank’s and credit card’s website. You have a listing of expense categories that you can sufficiently analyze once you pull the information together. Now what? Get categorizing! Ideally, you should have a spreadsheet that looks similar to the picture below:
Every expense, unless a true one-off item, needs to be categorized. This can take time. You can have a lot of expenses over a three months period. Take your time and think about each one. Being as accurate as possible now will make things significantly easier going forward.
The last step of this process is getting a total for each category. In excel, there are many ways you can do this: pivot tables, filtering, sumif statements. It is up to you which way you do it. If you need any help with how to add things up quickly, leave a comment below and I will be sure to give you the guidance you need. Excel is a great tool but can be tricky to use, especially if you aren’t using it every day. Below are some guides from around the internet to get started:
Income
Figuring out the income amount to include in your budget is far easier than categorizing your expense, but is just as important. Knowing what your take home pay compared to your salary and what causes that difference can help increase the amount of money you take home each pay period.
The above picture is taken directly from the Budget Template, which you can download at the end of this post. You will see that within the income tab it asks you to fill out information using your pay stub instead of just having the balance that is deposited into your bank account. Take a moment to get this information and enter it in as it will start to paint the picture of where a large amount of your money is going and if there are ways you can save by lowering or getting rid of various deductions from your pay that are unnecessary.
One large payment that many people receive each year is their tax refunds. Do not include this in your information gathering. You will see that there is no line for it included in the budget template. The tax refund money that you receive from the federal government is not income to you at all. It is a repayment made to you by the federal government due to you overpaying taxes during the year. It could have been yours all along! We will discuss taxes in the post ahead and how to change your withholding to increase your income on a monthly basis.
What’s Next?
Once you have compiled all of the information discussed above, it is time to start building your budget! The more time you spend gathering the information, and then analyzing the information, the easier it will be to build a budget that you can stick to each and every month that will lead you to the life you always dreamed of living.
In the next post we will discuss building your budget from the ground up and begin to show you the power you have over your spending and your debt. It will take time, but with the right foundation which we are building, you will make progress each month until your debt no longer controls your life. Please leave any questions or comments below and subscribe to make sure you don’t miss out on any of the following articles! Always remember, when your debt dies your life will rise!
Feel free to download the budget template below to see some budget categories for you to consider! If it is missing any categories that are important to you, let me know in the comments below so I can add them and feel free to add them to your downloaded copy as well.
Let’s dance, its Budget Time!