Thursday, May 14, 2015

Budgeting 101

From time to time, co-workers, friends or family, have asked my husband and I for advice on budgeting. Since I do my budgeting on a spreadsheet, I have a template lined up that I can send without sending our actual numbers.

Since it's been awhile from my last budgeting post, I decided to pass along my budget, along with some useful budgeting advice. The template includes my actual budgeting categories and then are color coded to sample budget categories. The "actual" percentages I use are based on our previous income, so I should probably work on updating that to our new income and new expenses (my guess will be that food will be a lower percentage and housing will be a higher percentage).

Basic budgeting 101 advice:
  • Before you even start budgeting, take some time to think and write down what you want your priorities to be spending-wise. Do you value clothing spending over food? Do you just want to increase your savings by $50 a month? Do you hate to spend money on your car? Do you love to spend money on trips? Write down your priorities so you have a plan to work towards.
  • Use your actual spending numbers for your first budget. This is actually somewhat easier if you use only credit cards or debit cards for your spending. Track down where every dollar went (credit cards, cash, debit cards, checks, online bill pay) and allocate into your categories. Feel free to add sub-categories, but I suggest starting with no more than 10 categories in the beginning. Once you have those expenses in the categories, add up your total monthly spending in each category, then compare it to the sample categories.
  • Pick a category to "whittle down" first. You may find, that even though you think you prioritize clothing over food, you've eaten out 10 times in the last month, and your food expenses are double what you thought they were. You may also find that your car expenses are way over the "sample" percentages, and you hate spending that much money on a car you only drive to work and back. Whichever category you are unhappy with (in other words it's over the sample percentage AND it's not a priority spending area for you) look at it more carefully to see if you can reduce any of the expenses within that category.
  • After you pick your first "whittle down" category, see if there are any obvious problems in your budget. If your housing is 50% of your income, it will be nearly impossible to get your budget to balance. If your car expenses are 30% of your income, you are going to have to make some big changes to other categories. Decide if it's worth the sacrifices. If not, see if there are any changes you can make. These big ticket items are truly the only way to get "on a budget" and stop spending more than you earn. When I was a debt counselor, I can't tell you how many times that my clients "couldn't" get on a budget because of huge car or house expenses. They certainly "could" but they weren't willing to trade in their fancy cars or sell their house (even if they were a single woman living in a $300,000 McMansion). Sometimes, big sacrifices have to be made, and the sooner you make these big changes, the better.
  • If you truly can't make your budget work, and you aren't spending big in any particular area, and don't see any way to whittle down any category, your other option is to earn more income. Some short term ideas include holding a garage sale, selling items on ebay or craigslist, mowing your neighbors lawns, babysitting, or tutoring. Longer-term solutions include asking for a pay raise, overtime (if available), a second or third job, or looking for a higher paying job. In some instances, it may actually save more money if someone stays home to take care of children for a few years rather than paying for private daycare or private school ($10,000 or so per kid in my area for either option).
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