Creating a Budget - Beautifully Quaint

Last month I declared a spending freeze to help me take control of my financial life (you can read about it here: “Enough Is Enough”). I stated that the next step was to create a budget so here I am to revisit the spending freeze and talk about how to create a budget for yourself. Make sure you check out the free online service to help you keep track of your spending at the end of this post!

The goal of the spending freeze was to get out of the habit of mindless spending so that I can change my mindset to intentional spending. I stopped making impulse purchases and only paid what I absolutely needed to. It was also a good time to cancel any outgoing payments for services that I do not need. I give myself a B. Why a B? I stopped most spending but I did get an occasional $1 coffee on my way to work and once I got my kids chicken nuggets for dinner because we ran around all day and it was late. I did, however, cancel any unnecessary subscriptions and services that I can do without.

Now that I am on the road to stop making unnecessary purchases, it is time to analyze where all of my money is going with a budget. Now, DON’T PANIC! A budget often scares people or it feels very restrictive and hard to stick to but I am using it strictly as a tool.
By creating a budget, you can see how much money you make, what you absolutely have to pay and then where the rest of your money is going. Most people, when they create a budget are surprised at how much money they are giving away without realizing it.

Steps to creating your budget:

Write down what you make a month after taxes and everything else has been taken out. If this amount varies, average several months of your income to get a general idea.
Figure out what you spend each month on your bills. Your mortgage, student loans, car payment, utilities, fuel, etc are generally about the same each month. For those bills that vary, you can average several months together to see what your general payment is a month. Divide bills like insurance that are often paid every 6 months or so you know how much it costs you monthly (for example: If you pay $840 every 6 months for insurance, take 840/6=$140 a month). Don’t forget to include groceries, diapers, kids activities, etc.
Once you have your income and expenses for the month, it is time to analyze your spending. With all of the information laid out in front of you, you can see what you have left over at the end of the month and where you have wiggle room. If you find you are spending more than you make a month you need to take a serious look at what you are spending and where you can cut back. Maybe you spend too much on groceries and can cut back by paying more attention to what you buy when at the store. Maybe you realize you don’t need the highest cable package and can downgrade to save money.

If you find you have money left over, you need to decide what you are going to do with it. This is the money you put into savings, use for vacation, birthday and Christmas gifts, going out with friends, pay off debt and so on. Two ways to allocate this money is as follows:

Option A: Divide the leftover money into categories like “longterm savings” (this is your retirement fund), “short-term savings” (this is vacation, home improvements, buying a car, etc), “spending” (this can be going out or shopping), “gifts” (budgeting for gifts is a great idea! Not only are you not broke at the end of the year, it gives you a limit to work with so you don’t accidentally overspend), “emergency/misc” (this is for when you have unexpected expenses like a flat tire that you don’t want to dip into one of the other categories to pay for). There are a lot of categories you could come up with and you can have as few or as many as you want (they are based on your goals/priorities). This system work by assigning each category a percentage of the “leftover money” and when you receive your paycheck you put the correct percentage into the designated categories.

Option B: Conquering Debt

If you have debt that you want to payoff (and I highly recommend you do) then you would divide the leftover money a little differently. It is important that you still have savings and budgeting for gifts is still a good idea. However, if you are serious about getting out of debt then vacations and home improvements along with shopping sprees and dinners out should be put on hold. The money you would spend on those things you will put towards paying down your debt. Obviously, the more you put towards your debt, the sooner you will have it paid off (as long as you aren’t spending unnecessarily, that is).

Creating a budget can take a few months to gather all the financial information. Don’t get frustrated. Start your budget by writing down what you know and then as you collect more information you can add it to your budget.