Budgeting – many people hate the word and dread the thought. Here is a more friendly sounding term – Spending Plan. Budgeting is simply making a plan for how you spend your money.
The idea of a budget can be intimidating, but the truth is anyone can do it and you don’t need to be a math wiz. All you need is a simple calculator, a little organization, and some commitment.
Before you create a plan for your money, you want to understand different types of expenses.
Fixed expenses are things that cost the same amount each month such as rent, mortgage payments, loan payments, insurance payments, cable bill, phone bill, child care, utilities (if you have average billing set up), etc.
Flexible expenses are items that change in amount each month such as groceries, eating out, clothing and personal care, transportation, medical care, gifts and donations, and recreation.
Occasional expenses, or periodic expenses, are expenses that don’t necessarily happen each month or they happen only every once in a while. Some examples would be oil changes, birthday gifts, Christmas gifts, purchasing shoes, sports enrollment fees, school expenses, car license plates, pet expenses, car insurance, etc.
Make sure you plan for these expenses and know what months they occur. If you add up all these expenses and divide by 12, that will give you a monthly amount to save to cover those expenses. Use a worksheet to list everything out for each month.
Creating a spending plan can be broken down into some simple steps.
Step 1: Set Financial Goals
Think about what you need to save for this month, this year, in 3 – 5 years, in 10 years. Do you plan to take a vacation, plan a wedding, save for retirement? Goals will help you decide how much of your income you need to save each month. Make goals SMART – specific, measurable, agreed-upon, realistic, and timed.
Step 2: Total Monthly Income
Include all sources of income from jobs, bonuses, commission, retirement, food stamps, unemployment, etc.
Step 3: Track Your Spending and Total Expenses
Record your monthly expenses and categorize each expense. You can use a budget form, money management calendar, phone application, excel spreadsheet, or simply a notebook. Add up your category totals and add up the grand total of your expenses.
Step 4: Compare Total Expenses to Total Income
Ask yourself these questions:
- Are your expenses less than your income? Do you have money left over? (If not, maybe you missed some expenses or you may be using credit to spend more than you have coming in.)
- Are your expenses more than your income? Look for expenses you can cut.
- Does your spending match your goals?
Step 5: Create the Spending Plan
Set a planned amount for each category to create your spending plan. Evaluate your tracked expenses and adjust to create your plan for the next month. Write your plan down. Ask yourself some questions as you look at your tracked expenses:
- Were you spending more on certain expenses than you realized?
- Are there any areas where you can reduce expenses?
- How much do you think you can cut realistically?
Make sure to leave some wiggle room to handle surprises. Review your goals and build savings into your fixed expenses. Pay yourself first so you won’t be tempted to spend that money elsewhere. A good way to do this is to automate your savings. If your employer offers direct deposit, they may be able to split your check into savings and checking accounts for each paycheck.
Step 6: Continue Tracking and Repeat
Building a spending plan isn’t something you create once and never look at again. You will want to find an easy way for you to track your spending so you can make it a habit to compare your actual expenses to your plan each month. That may mean using a spreadsheet, keeping receipts, using a phone app, or using a money management calendar.
If you like filling out worksheets online, try Purdue’s Where Does Your Money Go, Purdue Extension system.
Not everyone uses the same methods. Set aside time for totaling your expenses and looking at your spending plan each month. For some, they may enter expenses daily. Others might set time aside once a week. Try to find something that will work for your schedule. You will probably find you need to make adjustments along the way and that’s perfectly fine.
Check out https://www.facebook.com/moneysmartcolorado for Colorado State University Extension Agents bringing financial education, programs and discussions to Coloradoans everywhere. For more information on personal finances check out Colorado State University Extension’s publications at https://extension.colostate.edu/topic-areas/family-home-consumer/.