Back to Basics. Making a Budget by Kelsey.

Thank you so much to Kelsey for this weeks post.     A basics series absolutely needs to cover how to make a simple budget.  Teaching someone how to set up a budget and make a plan is a real gift.  Sometimes we need to go back to the drawing board and make a new budget!  What worked before may no longer!  So if you are just starting out or needing a review then I will hand you over to Kelsey.

 

    Creating a household budget is one of the keys to helping us steward our finances well and live within our means.  When we know what's coming in and what's going out (how much and where), we can manage our money in a way that works for us and benefits our families.  I budget on a monthly basis and keep my method very simple.

    Step 1: Calculate monthly household income.

    Whether you have one source of income or several, the first step in creating a budget is to add up how much you have coming in each month.  This lets you see what you have to work with.  If your income varies from month to month, I would budget only off of what you are guaranteed to get, or the lowest amount you are expecting.  Don't be counting on an extra shift you may or may not pick up, for example.  This ensures that all of your needs will be met, and any extra income can be counted as a "bonus".  

    Step 2:  Add up fixed expenses.

    Fixed expenses are those recurring monthly bills that are generally considered "needs" and are usually around the same amount each month.  Things like mortgage or vehicle payments, health/home/vehicle/life insurances, and utilities fall into this category.  I know utilities tend to vary a little more based on usage- the key is to plan for your utilities to be on the higher end each month (check past statements to see the range of costs) to be sure they will be covered.  It is better to have a bill end up less than expected than for it to be higher than you planned.

    Step 3:  Income - Fixed expenses =  Variable Expenses

    Once you have figured out your income and subtracted your fixed expenses, you will see how much you have left for variable expenses (everything else).  Variable expenses are a mixture of wants and needs purchased throughout the month that can be broken down into categories like groceries, gas/petrol, clothing, gifts, entertainment, household items, etc.  As the name suggests, these expenses tend to vary from month to month.  The good news about variable expenses is that we usually have more power over them and can make adjustments to control what we spend and where.  

    If you are new to budgeting, it can feel overwhelming to try to figure out what your variable categories are and how much money should be allotted to each one.  I would suggest gathering all of last month's bills and statements and sitting down with a blank sheet of paper and several different colored highlighters.  Choose a color and, line by line, highlight all of the times you went out to eat.  On your blank sheet of paper, write "Restaurants" or "Take Out" and the total spent next to it.  Choose a different colored highlighter and, line by line, highlight all of your gas/petrol purchases, recording the total on your sheet of paper.  Keep going with your highlighters to highlight similar purchases, and you will start to see what your categories are and how much you typically spend in each one.  Some purchases are going to be a bit random and not seem to fit into their own category- things like postage stamps, supplies your child needed for a school project, a new garden hose, etc.  Keep a "Miscellaneous" category for those types of things.

    Once you finish that exercise, chances are that you are going to have some surprises about how quickly things can add up!  This is where you can really make a difference by trimming down excess, prioritizing what is important to you and eliminating or scaling back on the things that aren't.  I know so many people are put off by the restrictive nature of a budget, but it is really about shifting around available funds to make them work better for your life, not about deprivation!  It is very freeing to have the peace of mind knowing that your needs will be met and that whatever is left is put to best use for your family.  I want to add that this takes time and practice, so do not be discouraged if it takes a few months to figure out realistic amounts that you can stick to!

    There are many fancy apps and programs to help keep you on track with finances, but I always go back to the same basic budget sheet I've been using for 13 years because it's simple and it works for me.  I will share a sample (fictional example) to illustrate what a month in progress would look like:

    The section at the bottom right is where I record income each time a deposit is made.  I paste a mini calendar underneath and circle paydays.

    The section at the bottom left is for fixed expenses.  I list the bill, when it is due, and the amount.  When it is paid (and withdrawn from the bank), I put a check next to it.

    The top section is for variable expenses.  I have drawn lines to separate and label the categories.  At the bottom of each column, I write how much is allotted per month, and at the end of the month, I record how much I actually spent.  Each time I make a purchase, I record it in its appropriate section.  This lets me see throughout the month how much I've spent and how much I have left to spend in each category.  Sometimes, I use a post-it note to see at a glance.

    If you have stuck with me this far, thank you!  I hope I have explained everything in an easy-to-understand way.  I am not a financial expert of any kind (if it wasn't obvious enough, haha!) but this is what has worked well for my family and I hope you can find something helpful in it also.

Thank you Kelsey and good job!  I am a pen and paper person like you.  Andy was a spread sheet on the computer person.   Do whatever works for you.  When you see things in black and white it becomes real. I also like to consider what things cost yearly because some quite "harmless" habits can turn out to be costing thousands!  We just forget how little bits add up!  The flip side of this is how small savings add up!   

If you have tips you would like to share please do. I think it would be good to have a post on how to build an emergency fund as well.  There are many creative ways to build some savings.  My Nana saved 50c coins.   She also had a secret stash of change in a biscuit tin high up on her kitchen dresser.    At the end of each year I got to help count the 50c coins... it was often several hundred dollars which (back then) was pretty darn good!

Have a great week.xxx