How to Prepare for a Budget

As I’ve become an adult, and through my studies, I have learned that budgeting is EVERYTHING. You use a budget to estimate your income and expenditures for a set period of time, with keeping inside of your household budget that reflects a reading of future financial conditions and goals. In order to begin saying “we can spend $500 a month on groceries,” we must know how much money we currently spend on groceries, gas, personal care, rent, insurance, loans, etc.

My hope is that no matter where you are in life right now, you’ll be able to take away something from this. As a result, you will be able to help yourself or your family be in a better financial position.

NOTE: As you are beginning to create your budget, make sure you are keeping in mind your Emergency Fund Savings. Remember, this is an Essential, NOT an extra item that you need to begin saving for, or re-add to, if you’ve recently had an emergency and had to pull from this account.

Before beginning to record your income or expenses, you’ll want to do a few things:

  1. Categorize your expenses. Create categories that will realistically work for you.
    • Ask yourself, what type of breakdown do you want to see in your expense reports?
    • When you begin setting up a monthly budget, start with big categories before breaking your budget down into small expense categories.
    • Note: Bills: NOT a category. What kind of bills? Loans? Housing? Insurance? etc.
  2. From your Categorized expenses (step 2), develop two separate budget lists, one for essentials and another for extras.
    • Remember: Essentials are items you MUST have to live (Starbucks is not an essential- although my morning-self would like to tell me it is).

In order to look at a year’s budget, you first must look at a monthly budget. In order to create a monthly budget you need to begin documenting all income and expenses in your day to day life. Whether it is a soda at the gas station for $1.24 or a stop through subway for $7.83. WRITE IT DOWN. If you put everything on your card, maybe using a Wells Fargo or Chase app can keep track of it all for you. However, if you pay things in cash, you are going to want a better way to track your outflows of money. My recommendations for tracking expenses:time

  • Keep a log (I like writing things down, it forces me to think about what I’m spending money on)
  • Mint app (you can access this from a computer and your phone and synchronize them)
  • Wells Fargo app, etc.

You might be asking, why you need to keep track? Most noteworthy, tracking each monthly expense forces you to physically see what you are really spending your money on. If you guess and take averages on what you think you have spent money on, I will guarantee your budgeting system will not work!

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Emergency Fund Savings

Now, at the end of the month, take the journal entries that you have made and do the following:

  1. Calculate your monthly Income. (I like to begin looking at income- the exciting piece).
    • If you make a yearly salary, divide it by 12
    • If you make an hourly wage, figure out how much you brought in that month in detail (this might change from week to week, and that’s okay. Remember, WRITE IT DOWN! You are looking at how to record previous expenses and income).
  2. Go through your tracked expenses records. You are going to take the log that you’ve created throughout the month and break it into the categories you made.
    • Remember, the categories were your starting point, and they might occasionally have to change. However, try to not change this too frequently because you want to be able to compare month to month.
    • My advice: I go through each transaction at the end of the week and account for each item I have purchased. If I have purchased anything that week with cash, that day, I go into my spreadsheet to track my purchase so I don’t forget it!
  3. Add up your budget essentials list and the extras list separately.
    • Remember, creating a savings account (different than an emergency fund) is just as important as paying your mortgage bill, and falls as an expense.
  4. Subtract the essentials total from your monthly income and, IF you have money left over, subtract the extras total from that amount.
  5. If your extras list takes you into negative numbers, you have probably run into your savings account money! If this is the case, you need to start looking for places to cut back.
  6. Cutting back. Finally, look through the list of your other/extras categories first to find flexible budget expenses where you can cut back.
    • Can’t find any extra’s that you’re able to cut back on? Maybe it’s time to begin looking for extra income. (I’ll touch on this later!)

Once you’ve done this process (tracked expenses, placed into categories, found your net income or net loss) for about 3 months you are ready to set a solid budget. Then, average your expense categories for the months you have tracked. Example: You now know, every month you are actually only spending $300 on groceries, but you are spending $250 on eating out. (These numbers are an average grocery category totaled up and divided by three months. Same for the eating out.)

The-Budgeting-Tool-January-2012-Pie-Chart

At this point, creating a budget enables you to analyze and figure out what to do with your excess money:

OR you might need to analyze your situation and figure out where to cut money or where to get extra income from. From a budget, you’ll be able to tell how much additional money you actually need each month.

Screen Shot 2016-04-19 at 5.36.19 PMHere’s the good news: You’re heading in the right direction! You have decided to take control of your financials. Here’s the not so good news: we’re all going to hit some bumpy roads when trying to become financially prepared. Remember, you’re not alone, everyone struggles at some point. Also, if you are struggling, remember that the work you are doing today matters. You may not like this period of financial instability, but I promise something good can come from it.

Create goals, track your expenses, set a budget, maintain your emergency fund account, and you will be successful.

Please leave me some comments on your plan to create a budget each month. Along with the software or products you use currently or might use in the future. Feel free to contact me with any questions or comments you have, or if you are seeking assistance in getting started. After all, this is what I’ve spent six years studying! Hence my goal is to assist others in becoming financial successfully!

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Katie Montang

9 Comments

  1. I’m not sure where you’re getting your information, but great topic. I needs to spend some time learning more or understanding more. Thanks for fantastic info I was looking for this info for my mission.

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