Creating a spending plan can seem daunting, but a few simple budgeting tips can help you get started and keep you on track.
Many of us probably grew up seeing our parents or grandparents tossing their loose change into a container of some type. Maybe an old coffee can, or a piggy bank, or perhaps an empty Mason jar. Every so often we’d dump the contents on the floor, separate the coins into piles of similar denomination, and see how much we had. If we were going to take them to the bank we’d carefully roll them in coin wrappers, making sure we include the exact amount for each type of coin.
Then one day an enterprising entrepreneur invented the automatic coin sorter. Now we can take our unwrapped coins to the bank where a machine will sort and total them in mere seconds. A great idea, for sure, but it’s a little sad that fewer children will sit with their grandparents acting like Scrooge McDuck adding up our vast wealth! Nothing says wealth to a kid more than a 20-pound bag of change (even if it’s only worth a few bucks!).
Budgeting is a Big Coin Sorter
I view the budgeting process as nothing more than a coin sorting machine. We dump in our income for the month and the sorter (budget) separates it into the various categories of saving, investing, giving, or spending. Just as the coin sorter accounts for all the change, the budget process accounts for the use of all the income arriving that month. Nothing is wasted, lost, or frivolously spent.
Budgeting tools come in all shapes and sizes. It can be as simple as a legal pad or Excel spreadsheet. For those more tech-savvy, low-cost tools like You Need A Budget (YNAB) and Everydollar also exist to help in the budget process. Regardless of which method you use, the basic process is the same.
8 Tips to Help You Start Budgeting
But how do you get started? What tools do you use to get it done each month? Are there some basic budgeting tips to remember?
1. Write Down Your Expenses
For those who have never budgeted before, I always suggest they look forward by first looking back. As well as can be determined, look back to the previous month or two’s expenditures and see where your money went. Unless your bank balance grew, something happened to the money. Was it spent on expenses? If so, on what expenses was it spent and how much of each type? Was it sent to a savings or investment account? Was a portion of it donated?
There may be amounts you can’t account for. A check was cashed or an ATM withdrawal was made and you don’t remember what you did with the money. It’s OK! Account for what you can – that’s all anyone can ask of themselves.
2. Calculate Your Income
With this information in hand, turn your attention to the upcoming month. In most instances, families have a reasonable idea of the income they are expecting the next month. Yes, there are instances of seasonal work or perhaps unpredictable commissions that make determining the amount of income difficult. But even in these situations, a reasonable estimate of the next month’s expected income should be possible to determine.
3. Allocate Your Income
Your next step will be to act like that coin sorter: allocate that estimated income into different categories of your budget, accounting for all the ways you plan to spend, save, invest and give away those dollars.
Every dollar should be accounted for! If you leave it unassigned it will surely be spent (more likely wasted) on some unknown purchase. Lost money like this is what slows down (or prevents entirely) you creating financial freedom and control.
If it seems like it’s not worth the effort, refer back to my earlier post on the advantages of budgeting and why we go through the process of creating a spending plan to remind yourself of why the effort is worth it.
When my family started creating a spending plan each month, we were shocked at how much we were spending in some categories with nothing to show for it. The budget allowed us to tell our money where to go instead of wondering where it went (thank John Maxwell for coining that line). Don’t underestimate the value of going through the process.
Free Monthly Budget Spreadsheet Template
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4. Only Budget One Month at a Time
Only budget one month at a time, and don’t plan on doing it once and copying it over and over. Yes, many of the items will be the same month-to-month, but variables always arrive, whether it’s a bonus at work or an expense that only occurs quarterly or annually. Focus on just the next month.
5. Work With Your Spouse
For those who are married, your budget should be a collaborative process between a husband and wife, not a document prepared by one and forced on the other. It’s fine for one to prepare the first draft of the budget, but both parties should have their voices heard and their priorities included in the spending plan.
6. Find an Accountability Partner
For those who are single, find an accountability partner! It is tough, especially in the first few months when it seems like a lot of work with limited benefits, to stick with creating a spending plan every month. Having someone to hold you accountable to do so will help tremendously.
If possible, find someone going through the process on their own, too, so you can hold each other accountable.
7. Prepare for Failure
Anticipate the budget process to not go well for several months. Budgeting is a skill and it takes time to learn. It also takes time for sporadic expenditures (that are easily forgotten) to reoccur and remind you of their existence.
8. Make Adjustments
Once the budget is prepared, it should be treated as if it was prepared in pencil, not etched in stone. During the month things will arise that weren’t in the budget. When that happens, get back together with your spouse (if married) to adjust the budget as necessary. You’re not in Congress, so if you need to spend more in one area reduce another planned expenditure.
The monthly planning process should continue, no matter what level of financial success you achieve. You never “graduate” from planning. But the process will get easier and less time-consuming as you gain experience.