I may wish to pay only $250 per month in gas, but if I have been paying $400 per month for the past year, it is an unrealistic goal. The more accurately the numbers reflect your current income, expenses and debt, the better you can plan for the future.
Whether you are ready to start seriously looking at your finances for the first time, or are in need of a major overhaul, here is a good place to begin.
Budget Basics — Where am I?
The first thing to do is create what I like to call a “Financial Snapshot.” This is made up of income, fixed expenses, savings and investments, and debt. You can use paper, a spreadsheet, the back of your napkin at the diner, just start getting it written down. Look up the current balance and the interest rates you pay off debt, whether it is student loans or a credit card.
Fixed expenses are things that are always the same every month and that you have a commitment to pay, such as rent or mortgage, auto loans and insurance.
What about income that varies each month?
Variable income that changes month by month, like ours (my husband is a contractor with his own business) can be tricky to figure out. I keep track of his monthly earnings and then use an average to get a pretty good idea of his income. The same is done with expenses that are paid one or a few time per year, such as auto insurance. I use the amount the payment would be per month, even though it is paid semi-annually.
With all the changes our family underwent in the past couple years — marriage, combining income and households, purchasing a home, starting a business — it seemed every month both our income and expenses were constantly changing. In our case, it has taken me many months of careful tracking to get a good idea of our average monthly income and expenses. If you are fortunate to have a steady monthly income and little change to your living expenses, this step may be very easy for you.
Variable expenses are all the rest of the things you spend money on, from gifts to groceries, haircuts to pet care. This is where tracking your spending and coming up with what an average month looks like for you, is most revealing. For instance, while I may spend $50 on pet food and cat litter (and treats, toys, etc) per month generally, I also have to factor in annual vet exams and shots, care if I am away, and other costs that creep in throughout the year. Take the approximate amount you spend per year on all pet care costs and divide it by 12 to get your average monthly expense. By not taking into consideration all the expenses that occur throughout a given year, you may find yourself with a huge unexpected vet bill and fall into debt.
Figuring out what you spend on gifts is another example. You may think you spend $30 per month on gifts for birthdays and occasions that occur each month. However, are you including associated costs such as gift wrap, postage, cards, and what about Christmas? Some expenses you will be able to fairly estimate just from your experience, others will take diligent tracking to get an idea. Go through receipts, checking and credit card account statements for data.
If you lack past data to pull, you can start tracking your expenses now. It may take a few months to get a good and accurate picture of your current spending.
next … Budget is a Verb