How to Establish a Budget

Ever tried to compile a budget to see how much you spend each month and what you spend it on? It’s a bit tedious, but is definitely worth the effort, especially if you’re spending more than you’re bringing in. You can’t get ahead by saving and investing until you have control of your expenses. So how do you get started on creating a budget? What I suggest is first deciding how you want to keep track of your expenses, and over what timeframe. Any spreadsheet software application like Excel is more than adequate, assuming you know how to use it. If you’re not comfortable using computer software such as Excel to create a spreadsheet, start by keeping a notebook to write down your daily expenses. Compile a couple months of expenses, and make sure to also think about bills you only pay once per year, such as property taxes, homeowners insurance, holiday gifts, or income taxes. Incorporate those one-time expenses into your budget. Whereas the notebook is fine to get started, it’s not practical to do this exercise entirely by pencil and paper, so I suggest researching online software tools or smartphone apps which allow you to enter expenses by category. The software/app will compile and format everything once you’ve entered it in. There are many tools/apps out there these days to help establish your budget. A few of note include Mint, which can not only track your expenses, but also your credit cards, bank accounts, and investments. And since Mint is owned by Intuit, your data can be fed into TurboTax when it’s tax time. Level Money connects to your bank accounts and estimates your income and spending habits, which are then adjusted based on goals you set. PearBudget is a web app allowing you to manually enter income and expenses by category. It’s pretty basic, starting life as an Excel spreadsheet, but now featuring goal setting and planning tools in addition to basic income and expense tracking. EveryDollar is Dave Ramsey’s budgeting app for iPhone and Android. It’s easy to use, with many helpful visuals, and allows you to create a budgeting plan in addition to tracking income and expenses. Other expense tracking tools include Abacus, ExpensePoint, Expensify, ExpenseBot, Certify Now, Zoho Expense, ExpenseIt, and Receipt Bank. Once you’ve chosen your tool/app, start tracking your income and expenses – all of them! Remember to look at your bank statements to see what’s being automatically deducted and to keep track of the checks you write and ATM withdrawals you take. Debit and credit card statements are essential to this process as well. If you buy a cup of gourmet coffee at Starbuck’s every morning, make sure you log it in. Or if you pay your barber or hairdresser in cash, don’t forget to write it in your notebook temporarily, and then transfer into your expense tracking log on the tool/app you’ve chosen. Involve the entire family to gain a holistic picture of your expenses, but also to help them understand what you’re trying to accomplish and why it’s important to them also. Track your expenses for at least 6 months to get a good sense for what you’re bringing in and what you’re spending. The tool/app you’re using will most likely break out your expenses into categories, enabling you to quickly visualize where the money’s going and what opportunities there are to reduce your spending. Think of the various items you’re spending money on in terms of required expenses and discretionary expenses. You don’t have much choice about your mortgage or rental payment, your auto repairs and gasoline, your homeowner’s or renter’s insurance, and your work clothes. These are required expenses. But things like holiday gifts, vacations, gourmet coffee, home improvements, eating out, and entertainment are discretionary expenses, which is generally where you’ll need to look to find ways to reduce spending. Once you’ve got it all laid out, it’s easier to see what you need to do to start or increase savings and investing. Don’t be too militaristic, however. You need to live your life and have some fun doing it, and if you never allow yourself to have dinner with a friend or to attend a ballgame or concert, you’ll be miserable. And you probably won’t stick with your budget plan anyway. So definitely budget in some fun and entertainment, just don’t overdo it, and prioritize so you get to do the things most important to you and your family. And don’t think you have to track every expense forever and ever, you don’t. This is just to see where the money’s going and make any necessary adjustments to get your financial life on track. Once that’s done, it’s more a matter of monitoring your budget periodically to make sure you don’t run off course. Happy budgeting! Scott McClatchey is a Certified Financial Planner (CFP) at WWM Financial in Carlsbad. If you have questions or would like to schedule a meeting you can reach Scott at 760-692-5190 or scott@wwmfinancial.com You can learn more about us at www.WWMFinancial.com