Well, we’ve made our budget and we’ve been using it for a month. How did it go? Chances are you overspent some categories and underspent others. And that’s okay. The key to creating a budget you can stick to is all that tracking you’ve been doing with your trial budget. Overspending or underspending categories in the trial budget doesn’t matter as much as the simple act of tracking everything you spend to get an accurate picture of where your money is going. Having a realistic idea of that is the key to creating a successful budget.
Now we’re going to make a much firmer (and hopefully more accurate) but still, in my eyes, trial budget. From my own experience, if you haven’t been tracking your variable expenses at all before (groceries, gasoline, clothing, personal care, miscellaneous, etc) it takes more than a month’s worth of data to really get an accurate picture of what they are. But don’t despair! This budget will get more and more fine tuned until by the end of part 3, we’ll have a really accurate budget reflective of your lifestyle. At which point we can decide where to hack some off to help accomplish your big picture financial goals.
To create our new trial budget, use these six simple steps:
1. Determine what you actually spent in each category last month.
This should basically already be done by the virtue of the tracking you did.
2. Decide what was “necessary” and what was “extra” in each category.
Since you tracked all your expenses, you should be able to look at the things you spent money on in each category. Be honest with yourself and notate what was necessary and what wasn’t. Total each separately in each category.
3. Look at miscellaneous and see if anything there actually should be another category.
Sometimes many things in miscellaneous could actually be grouped together in a category of their own. This happened to me with pet expenses. I didn’t have a “pet” category and I should have. Looking at my miscellaneous expenses made this obvious.
4. For each category in your budget, set your budget number at the necessary total plus half to two-thirds (your call) the “extra”.
There needs to be wiggle room, but it only goes so far. Unless you’re misclassifying truly necessary expenses as extravagant, giving yourself some leeway but not as much leeway helps tighten your budget but allow you to have some fun, too.
5. Make sure you are keeping track of your irregular expenses and saving enough for them each month to, over the entire year, cover them all.
This is very very important to not be caught in a bind when those annual expenses come due. Make sure you are saving for all of your irregular expenses. In this area, erring high is better than erring low. You can always use extra left over for savings or debt reduction later.
6. Assign extra to savings, investing, or debt paydown.
This is still a zero-dollar budget with every dollar working for you. So if you have income left over, give it a purpose that is appropriate to your current life situation.
This is the budget you are going to make every effort to stick to. We are going to use this budget for the remainder of the calendar year, and aim to come in under or at budget in every category. Three months should be enough time to make any tweaks necessary and make sure that our budget is a realistic tool for us to use. Good luck, and in January we’ll address the fourth and final part of the series – making the most of the budgeting tool. See you then!