Budget Basics Overview – How to Set Up a Budget You Can Live With
One of the best tools that anyone can have is a budget.
Many of our clients learn how to successfully use a budget for the first time. These are valuable lessons that can be used by everyone who wants to manage their debt and build their financial security.
It starts (like most successful ventures) by closely following a few, simple steps:
Step 1 > Clearly identify your starting financial position
Step 2 > Clearly identify your financial goals
Step 3 > Set up a workable budget to get from where you are to where you want to be
Step 4 > Consistently review once a month to monitor progress and make required changes
To help you in the creation of your budget – we have set up instructions and examples for each of the required steps and we recommend you review each before you begin your budgeting journey.
If you are taking your first steps towards a more financially secure future – hang in there – it might prove challenging, but it is worth the effort!.
Step 1 – Clearly Identify Your Starting Financial Position
This is Step 1 of Budget Basics – Look at any map for directions and you will quickly discover that you need to know where you are now to determine how to get where you want to go. The same is true for building your financial security, yet most people would rather do almost anything than face their finances. This article and the others in this series will help you to take important steps towards successfully managing your finances and get you on the right path.
This process can be a little scary, especially if it is the first time you have done this. Just remember to be as honest and as accurate as you can be. The more accurate you are – the easier it will be to find your way out of debt and on your way to financial security.
In this step, you will be recording your income and expenses. When completed, this document will serve as a handy starting point to achieving your financial goals. If you are part of a family (2 or more people), you most likely will need to fill in all the family details of income and expenses on one worksheet. Whenever possible, we recommend that couples work on their family budget together.
Identifying Your Starting Financial Position (Where You Are Now):
- So let’s get started, download the interactive template worksheet below to help you organize and calculate your Expenses & Income: Expenses & Income worksheet
- Break your current expenses into three simple categories:
- income (money coming in);
- expenses (money going out); and,
- savings (money set aside for later use).
- Gather up all your financial records and have them handy. You may need to organize them somewhat depending on what your record-keeping system is like. Your financial records will include such things as bank statements, bills, income records (ie pay stubs), loan agreements, credit card statements, etc.
- Just do your best – if you don’t have all the information you need at your fingertips – make your best guess (you will be updating this information over time so don’t panic.
Break your current expenses into three simple categories:
- Fixed Monthly Expenses
- Variable Monthly Expenses
- Infrequent Expenses
Some of your expenses might not be in the same categories as shown. For example, if you pay your Auto Insurance monthly instead of annually, your Auto Insurance expenses will be a Fixed Monthly Expense rather than an Infrequent Expense. Note: where an average monthly expense is recorded will not change the total average current monthly expenses, so don’t worry too much – just make sure the expense is recorded and included in the total.
Not all of the items listed will apply to your situation – but make sure any expenses that do apply are recorded.
Fixed Monthly Expenses – those ‘same amount’ expenses you see every month – record monthly due date and monthly payment amount for each expense:
Rent / Mortgage – if you have a mortgage, record the total amount of the mortgage and the interest rate you are paying.
Judgements – ie Child Support, Alimony, etc.
Loan Payments – for each loan – write down a description of the loan (ie car), total amount of loan, interest rate being charged, and how long till the loan is paid off.
Credit Card Payments – for each credit card – write down the name of the card, monthly minimum payment (based on your current balance), total amount owing, interest rate being charged. Note we do not normally recommend just paying minimum payments on cards unless it is part of a larger pay-down-the-credit-cards plan.
Other Fixed Monthly Expenses
Variable Monthly Expenses – average monthly costs of those expenses that vary from month to month – include the monthly due date for each expense:
Heating – if not electric heat.
Transportation – Auto Gas, Parking, Auto Maintenance (monthly average), Bus Pass/Tickets, etc.
Entertainment – Restaurants/Pubs, Cigarettes, Movies (Rental & Theatre), Sports, Books, Hobbies & Crafts, etc
Other Variable Monthly Expenses
Infrequent Expenses – average monthly costs of those items that normally only occur once or twice a year:
Taxes – Property
Taxes – Income
Holiday Expenses – ie Christmas, Easter, Thanksgiving, etc
Other Infrequent Expenses
Now You Know Where You Are
Now that you have completed recording and calculating your average monthly expenses and income you have a much better idea of where you are in terms of your financial position. If you are like most of us, you had a few surprises during the process. But good or bad, it is always better to know where you stand in terms of your financial position.
Take the Next Step
The next step in our Budget Basics is to Clearly Identify Your Financial Goals (where you want to go). This was the First Step of a four-part series on setting up a workable budget. The entire series can be found here: