Budgeting, the backbone of your financial life. Since this is a personal finance blog, I figured I might as well write a little about the topic and share how I create my budget.
The first step is to know exactly how much you are bringing in for income per month. I only count the income from my paycheck as it is always a steady amount and doesn’t fluctuate on a month to month basis. I don’t count my dividend income as I usually re-invest all of it back into my stock portfolios.
If this is the first time you are making a budget, it really helps if you have at least several months worth of your spending records. This will give you a better starting point at what you normally spend and if there are any areas that you should try to reduce. If you’ve never tracked your daily spending, it can be a real eye-opener once you do it. Those $1.00 sodas from the machine at lunch and latte’s in the morning can really add up if your not tracking them. If you are someone who uses a debit/credit card for everything, you can simply use a copy of your month’s transactions. Personally I prefer to use a simple Excel spreadsheet, using six columns: Date, where I made the purchase, amount, category (food, gas, clothes, etc.), description (groceries, new work clothes, etc.), and then what I used as payment: cash, credit card, automatic online payment, etc. This way at the end of the month I have a complete picture of all my daily purchases. This helps me realize what areas I can potentially save money. Once you see “Starbucks” in that “Where” column everyday it quickly becomes obvious what you need to work on.
Using this information I can start to create a budget. I budget for three types of purchases: monthly, sporadic, and annual. Monthly includes food, internet bill, auto insurance, etc. that I pay for each month. Sporadic spending includes items such as clothes and textbooks that I usually spend a steady amount on per year, I just never always know what month I’ll be spending it. Annual expense are those one-time expenses that I pay every year such as my car registration renewal fee. If you pay off your insurance premium in one payment at the beginning of each year, then this could also go into the annual category.
Using this system I am able to know how much cash flow I will need to cover all my normal monthly expenses and how much I know I need to save specifically for those upcoming sporadic and annual ones instead of just throwing all my extra money into my portfolio or spending it on unnecessary expenses. 😉
Do you have a budget? How do you set it up? Does anyone use any of the online budgeting/money tracking services like Mint? Let me know in the comments below.