Welcome to Day 27 of Where’s My Money Going? Month! This February 2009, I’m challenging readers (and myself) to track spending manually for 28 days. Don’t worry if you’re late to the party, you’re still welcome to join. Consider tracking your spending into March.
Step 1. Start with what you spent last month.
If you’ve been tracking your spending in some dept this month, this shouldn’t be that hard to do. Simple assign a each purpose to a category (if you haven’t already) and come up with the amount spent in each category. You don’t have to do this in a fancy spreadsheet or program, in face a plain document or even a piece of paper might allow for more revisions and notes.
Also write down your monthly income (this will be the maximum amount you can budget…if you think you might earn a bit more on the side, budget that tentatively). Calculate the difference between the two. If it’s positive, then this is money you may be able to budget toward your goals. If it’s negative, one of your goals for the next month should probably be getting it to come out even.
Step 2. Identify your goals and changes you need to make.
During the month of tracking, you may have already started changing your spending habits as you’ve become more aware of them. Otherwise, this is the time to thoroughly review your purchases and consider what changes you’d like to make.
To know what changes are right for you, think about your financial goals and what you need to do to achieve them. Suppose that your current goal is to pay off your credit card debt as quickly as possible. Then you would want to look for places to find extra money to put toward debt repayment.
If you’re having trouble figuring out what to change, look at specific purchases instead of just the categories. Take the time to identify what’s critical, what’s important, what you’d rather not part with, and things you don’t mind giving up. You may have to make some decisions you don’t like…but do so because your financial goal makes you happier, not out of a sense of guilt. Financial guilt doesn’t normally produce lasting positive changes.
Adjust last month’s spending to reflect how you want to spend next month. Put any “extra” money in a category for your goal (e.g. “Debt repayment” or “Savings”). Find a home for every dollar you expect to receive.
Step 3. Plan for this month’s differences.
Look at your calendar and last few months’ spending to identify anything special about this month (or the last). Maybe you’ll need a haircut or you won’t need to get the oil changed. Last month I budgeted for a church trip, but I won’t be doing that any other month this year.
Don’t forget that there were only 28 days in February. That doesn’t affect most things in my budget, but it might have a small impact on food, gas, and other things we use every day.
You may also want to start planning for large annual expenses.
Step 4. Go over your budget with anyone else who’d have to follow it.
If your spouse or s/o hasn’t been interested in the budgeting process up ’till this point, be sure to run it by them before you ask them to commit to it.
Make sure that it has at least a little flex room. Look at that money as snowflaking money–you can spend it but you’d rather not because if you don’t spend it you’ll put it towards your financial goals at the end of the month.
Step 5. Finalize.
Put the numbers into your budget spreadsheet, YNAB, whatever you’re using for budgeting this month. There have been times in my life where I’ve done a budget in my head, but that only really works for people spending less than a couple hundred each month (like I was in college). Even then, I did better once I started using a budget.
Depending on your goals and spending habits, those 5 steps may have taken a lot of time. Don’t let this scare you away from budgeting. Future budgets will generally be easier to put together. Most months you can start with last month’s budget and move straight to step 3 (though if the budget was a complete disaster, you’ll want to start again at step 1).
But every time your financial goals change, or at least once a year if they don’t, go through the whole process–tracking, evaluating, budgeting. Doing so helps you avoid spending creep. It also gives you a chance to re-evaluate where you are and what you want out of your money.
This post was part of Where’s My Money Going? Month.