Budgets: Where to Begin

I get it. Budgeting is not the coolest or flashiest thing to talk about when it comes to financial planning. It is like the two-a-day practices you used to dread when you were playing high school sports. Or the endless scales if you are a musician. Budgeting is tedious, time-consuming, and challenges you to take a look at what you’re doing with your hard-earned money. I know it can be tough for me when I look back at my monthly spending summary and see I spent $40 on items I didn’t need!

However, we need to understand the purpose of budgeting. The purpose is for you have a good idea of where you’re spending money, and how you can use that information to create better spending habits.

In this article, I will walk you through the steps I used to create a solid financial budget.

Step 1: Understand Your Current Habits

              Look at your last 2-3 months of spending and establish your baseline. This will be the rough outline of the budget you set in place. The first thing we need to do is understand our current situation. Ask yourself these questions:

1. What am I spending each month?
2. Is that within my current cash flow?
3. What goals do I want to accomplish with this information?

Step 2: Categorize Your Spending

When creating my budget, I reviewed all of my transactions for the 2-3 months prior and sorted each item into 8 categories:

1. 1. 1. Savings
         • retirement plan & savings account contributions
      2. Mortgage/Rent
         • Monthly Rent
      3. Insurance
         • Renter’s Insurance, Car Insurance, Life Insurance
      4. Bills & Utilities
         • Electric, gas, YouTube TV, water

1. 1. 5. Food
         • All grocery items minus dates out or happy hour (these I classify as entertainment)
      6. Auto & Transport
         • Gas, Oil Change, Uber Fees
      7. Health & Fitness
         • Gym membership, equipment, workout clothes, shoes
      8. Entertainment
         • EVERYTHING ELSE

By organizing my spending into categories, I have actually created my “current budget”. I also listed these categories in importance to me. The first 4, “above-the-line” categories are what I deem as fixed expenses. The amount I put into savings is the same each month, just like my monthly rent, various insurances and bills. It is important to see saving as a necessary fixed expense. The last four, “below-the-line” categories are variable expenses and items that I see fluctuate month-to-month.

Step 3: Change One Thing

              At this point, you should have a good idea of your current spending habits and how to best categorize your budget. If everything looks good to you, then great! Keep doing what you’re doing. By completing the first two steps you will at the very least have the peace of mind you are on the right track. However, chances are if you are reading this article, you would like to change something about your current spending. Whether it be contributing more to a retirement plan, or spending less on eating out, there is usually something we can identify in our current spending habits that we would like to change.

We’ve all heard the saying Rome wasn’t built in a day. This cliché should be applied to your budget. Just like when beginning a new diet, or workout plan, you have to take it slow. If you create the “perfect” budget but it requires a full shift in habits, chances are you will stick to it for a few weeks, then make a mistake, feel guilty, and quit. But if we make one small change each month, in 1 year you will look back and see just how far you’ve come; it is incredibly rewarding! My challenge to you is to make one change to your current spending and stick to it for 1 month. It may be simply adding an extra $50 to your savings account by spending less on eating out. Or find a way to decrease current bills. Brett Roper’s blog post, “Why I Chose to Cut the Cord on Cable TV” detailed how Brett saved $37 per month on his internet bill! This allows him to find an area of his budget he can now expand upon.

Step 4: Monitoring

Keep track of your monthly spending and make sure your budgets are set appropriately. For RPJ clients, we have tools that can help you track your budget automatically. There are also many budgeting apps that you can use. Although outside the scope of this post, analyzing a couple different budget apps might be something for a future blog post.

By categorizing spending and creating a budget, you will have a better understanding of where your money goes each month. Creating a budget, and more importantly maintaining a budget, does require effort and time. But if you challenge yourself to better your spending habits little by little, over time you will see your hard work pay off.