Budgeting 101- Part 3
Setting a Budget


We're back with our discussions on budgeting. This is the #1 requested session during our financial counseling classes. If you missed the first two posts, never fear, you can access them here: Budgeting 101- Part 1 & Budgeting 101- Part 2. Since our talks build upon previous discussions, be sure not to skip any sections or homework- it's important.


Today we will be actually setting your budget based upon the work you did in Part 2 by tracking your spending. What we develop today, you'll use next month and from now on. It's always interesting to me that many people try to jump right in to setting a budget with no concept or overall picture of what they actually spend. We're budgeting for success, not just to have one that doesn't suit our needs. Now that you've done all the groundwork, let's begin...

1. For starters, let's look at a comprehensive view of how you spent money last month. Take what you spent last month and place it into the categories found on this sample budget worksheet (you'll need to print this out). Are you shocked by anything? Was this month typical of your lifestyle and spending habits? Perhaps, you are surprised at how much or little you spend in a certain area. No worries, we will make modifications shortly, but this is an important strating point.


2. Next, we begin with how you earn income. This will apply to everyone, even if you work on commission or tips. We begin here because as a rule of thumb (and common sense), you cannot spend what you do not have. Period. This budget is based upon your actual earnings. We'll develop a system that does not allow you to depend on credit or payday advances in order to function financially.
   


• Place your total net (employment and social security taxes are taken out) monthly income on the modifiable spreadsheet. For most people, this number matches the deposit or automatic deposit in the bank.



• If your income fluctuates significantly, such as those of you who work on commission or tips, take the lowest monthly earnings you had in a single month over the last 12 months and use that number for your budget. In this case, using the lowest earnings helps to ensure that you continually have enough for your expenses even in harder times. Another option is to add up the last 12 months and divide by 12 to get an average of what you earn. Your budget will be more difficult if you choose this option because some months will be lower and others higher. If you don't mind the inconsistency, you can select this option.
  
  
3. Next, place the essential life items in the total budget column of your budget spreadsheet. These are your major expenses that are often non-negotiable like mortgage/ rent, health insurance, loan payments, etc. For the most part, these should be expenses that do not fluctuate very often. Now take an assessment of how much money you have left to spend.


4. Beginning with what you need/ want the most start placing a budgeted amount in the total budget column on the remaining items. Starting what what you need like groceries and gas and ending with what you like such as eating out and clothing, for example, fill in all of the boxes skipping anything that does not apply to you. The taxes will not be filled in unless you have discussed paying federal or state taxes ahead of time with your tax professional.


5. After placing in your numbers, let's check some math. Does your total budget box = the total monthly income box? This is the goal. Ideally, you will design a budget that equals what you earn. You may budget less than what you make but you may never budget more than what you earn!


6. If your numbers do not match, take some time now to tweek your budget. Be realistic, you'll be living with this guide from now on. Could you get your hair done less often? Spend less on groceries? Save more? Cancel the gym membership?


7. Once your budget= your income then revisit your dream list. Are you planning financially for your dreams? If, for example, you want to send your kids to college, are you reserving some money in your budget now to do so? Your new budget should reflect both your present and your future.


8. Finally, do some give and take. It's time to see an overview of what your spending plan is for this upcoming month. Can you live with the numbers you entered? Are you balanced & realistic? Take a second to just double check. As a rule, your budget must have an emergency fund/ savings built in. If this causes you to be over budget, then some other area has to decrease. The motto you will hear again is simply: it has to come from somewhere.

Homework

This month's homework is going to be easy and complex at the same time. I want you to see about living by this budget. That means that as you spend, you should enter your total in on the spreadsheet right away. If your eating out budget is $50 and you get take out tonight, subtract the $20 right away. That way, you always know how much you have left to spend.

In our final segment, we will discuss what to do if you overspend or underspend. For now, focus on tracking what you spend in your new budget plan. Congratulations, you've come a long way!

Budgeting 101 Part 1 Budgeting 101 Part 2