Where Do I Even Start?

February 28, 2017

by — Posted in Finances

Budgeting can seem overwhelming. It’s downright scary to face the facts and see what’s really there. But there’s good news! Facing it head on with a plan will get you where you want to be a whole lot faster than the alternative. You can do it! I believe in you!

But where do we start?

Take stock. First, you need to know where you stand. Find out exactly how much you owe on your debts. Look back at your last month or two and figure out where you’re spending money. It’s best to know your typical spending habits in order to make changes, because a budget that is a complete lifestyle change is going to be a lot harder to keep than one that is a slight shift. Many bank and credit card websites will show you a general tracker that shows you how much you’re spending where.

Write it out. Get out paper and a pencil (preferably one that erases easily) or, as is Ansen’s preference, open an excel file. Now, start with your income. Do you get paid every week, every 2 weeks, or twice a month? Total it for the month and put that at the top. Two earners? Side jobs? Put those each on their own line and subtotal it.

Now put your fixed expenses. This is your rent or mortgage. It’s also any automatic or recurring bills: internet, cell phone, utilities, car payment, student loans, etc. Use your bank or credit card statement to look back at the history of these. For something like utilities that can change, go with the average (and round up). Subtotal all of these.

Next, put your variable necessities. This includes things like groceries, household products, pet products, and toiletries. These are your flex categories and can be a little bit more difficult to pinpoint, but it’s not impossible! Again, go back to your previous statements and see how much you spent in these areas. What does it cost for toilet paper and shampoo, for food, or for light bulbs? Add these up. You can lump these together, or you can separate them out, as per your preference. Our personal motto is that the broader the category, the more random stuff that gets put there, so we like to get pretty specific.

Then add your savings/debt reduction goals. If you want to save for a down payment on a house, or for a new car, that cruise you’ve been dying to take, or even just a new thing for the home, it needs to be in the budget. If you want to get out from under the weight of that credit card or those medical bills, it needs to be in the budget. If it’s not in the budget, it will either never happen or you’ll end up paying more for it through interest. Something is always better than nothing. You can use undebt.it as a resource if you need help determining the best course of action (like which to pay down first), but don’t get too distracted here for now.

Next, put your yearly expenses. These are things like Amazon Prime, car tags, magazine subscriptions, or t-ball sign ups. Take these and divide them by 12 (or if they’re due soon, divide by the number of months between now and then) and add them as a new line-item.

Lastly, put your non-essentials. This is where you put things that are not essential to life, but are nice things to have. Think wants versus needs. This might be cable, Netflix, Spotify, the Target splurges, the eating out, the coffee shops, etc. If there’s something significant you spend money on then give it a place, even if it’s just $5 a month.

Prioritize. Compare your income to your expenses. If you’re making more than you’re spending, congratulations! If there are more expenses than income, you will need to decide your priorities. No one can tell you what those ought to be, only you can! If you just can’t live without Amazon Prime, or you just can’t eat out less, by all means, give those a place, but you’ll have to find somewhere else to cut. It can be tough to make those choices. Choosing to give up Sunday lunches out so that you can pay down debt (and hopefully resume the tradition later on) is well worth the trade off in the long run. You may need to tweak numbers. Remember, it’s a living document and will change as your priorities change.

Live it. Give it a month or two trial and live it out. There are a couple of ways to track your budget, which we’ll talk about in the next blog. I’m not saying try budgeting for a month, I’m saying try YOUR budget for a month. If you way over-spend on a category, either adjust spending or adjust budgets for the next month. Tweak your numbers. You may need a different system. It may take a couple of months to get the hang of a particular system, or to decide it’s not the best for you. It may take 4-6 months to feel comfortable with the new parameters you’ve given yourself. After so many years of budgeting, I just know what it feels like to spend $X a month on groceries, but it definitely took some practice. At first, I employed my mom’s trick of bringing a calculator to the store and literally totaling groceries as I went and then making tough decisions about my impulse grabs if I was over, or being pleasantly surprised I could grab that ice cream after all.

Up Next… What system do I use?