Are you serious about getting yourself and your household on a budget? Not to be preachy, but you should be. This is probably the most powerful tool you have to build wealth. This is a series of articles regarding creating a budget and hopefully sticking to it. I will go into the specifics of using YNAB4, which is a software budgeting application that has some serious advantages over simply creating a paper budget.
That said, I highly recommend your first budget be created on paper. One thing you have to realize is that you are going to get your first budget wrong. Maybe your first 3-4 or maybe even 6 budgets wrong. Don’t let that derail or dishearten you. Expect it and get past it. Getting a budget “right” is a difficult process because no two months are the same. Your electricity bill in March and July are going to be significantly different. You are likely to have some expenses which come quarterly, bi-annually, or annually. Those should be noted and you should plan for them, but it’s hard to collect all of those before your first budget. Hopefully I’ll be able to help with that process too.
- 3-6 months of account statement for all of your banking accounts.
- Last 6-12 months utility bills.
- Last 3 months phone bills.
- Make a list of recurring irregular expenses (insurance bills, property taxes, etc., lawn care)
- List your recurring monthly expenses (mortgage/rent, auto loans, student loans, storage unit, childcare, medical bills, etc.)
You’ll also want to plan a little bit. Plan for expected car expenses (oil changes, repairs, tires), home expenses (repairs, upkeep, decorating expenses, projects of various types), hobbies, vacation or travel, business-related expenses.
Make sure you include some sort of “blow money” category and a category for unexpected expenses. No matter how hard you try, you’re going to forget to include something in your first few budgets. As you start rounding up those stragglers, you’ll find you can lower your “unexpected” category, but you need it or you’ll be blowing your budget out of the water.
Once you’ve gathered up your statements, you can use them to figure out your average monthly expenditures for:
- Food/Household goods
- Restaurants/Fast Food
- Child Care
- Clothing (keep in mind this may be concentrated in certain months or spread out depending on your specifics)
- Pet Expenses (food, grooming, kennel)
- Other categories you find yourself spending on monthly
Once you get this together, you’re most of the way to finding out how much you have been spending in various categories. Every household is going to be different in every one of these categories. Many, if not most people have little or no idea of how much money they typically spend in each of those areas. Without knowing how much you have been spending, how can you know where you need to cut back?
In my next post, I’ll discuss planning for income and actually creating the budget. You can’t budget without knowing your income, after all.
Let me know in the comments what you think of this so far. Also include other categories you think are essential, or types of expediters that occur less regularly but most people will have (like home insurance, property taxes, etc.) If you like this, please share it!