Budget Basics: Step 3

Step 3 – Setting Up Your Budget

This is Step 3 of Budget Basics – At this point, you have completed your Expense & Income worksheet – you have a good idea of how you are spending your money and how much money you are earning. You have begun to identify those financial goals that will help you to do the things you really want to do with your money – and you have selected one or more financial goals to start working on.

When you recorded your Expenses in your Expense & Income worksheet (Step 1) you discovered how much money you are spending every month on things that have little long-term value to you. Then, when you explored your financial goals (Step 2) you identified those things that do have long-term value to you. Living successfully on a budget is a way to plan and achieve your financial goals – while continuing to enjoy your day-to-day life.

How to Fill In Your Budget Worksheet

1. Look over your Expense & Income worksheet. Double check to make sure all your income and expenses were recorded accurately. Then, calculate how much difference is there between your Average Monthly Income and your Average Monthly Expenses. If you have more income than expenses (a surplus), is it enough to fund your financial goals? What are you doing with the surplus now? If you have no idea where the difference is going – you may have overstated your income, missed an expense item or you may be suffering from ‘dollar dribbles’ (those minor expenses we don’t usually realize we are making). To help you track this ‘missing money’, for the first two to four months you are on your budget, we recommend you keep a detailed record of all your expenses and income in a notebook that you keep with you and use at all times.

2. Regardless of whether you have a surplus or not – reducing expenses is an important factor in achieving your financial goals.

3. We recommend you set up separate savings accounts for your Infrequent Expenses and for your Financial Goals. This will make it easier to keep track of and make it more difficult to ‘accidently’ use your Financial Goal money. For the first several months of your new budget, there may not be enough saved to handle all of the Infrequent Expenses as they occur. Unless you have enough money set aside to handle these expenses, for the first six to eight months, it may be necessary to set your monthly budget for Infrequent Expenses at a higher level than the average identified in your Expense & Income worksheet. It may also be necessary to use some of your non-essential Variable Budget (ie Entertainment) to pay for Infrequent expenses during the first few months of the new budget. If there is no available money in your Variable Budget, as a last resort, you might have to use money from your Goals savings (if this happens, be sure to pay the entire amount back in asap).

4. Once you have laid out the first draft of your Budget worksheet (see below for details) – it is time to begin your planning. Fill in the ‘Budget $’ – the monthly budget amounts for Income and Fixed Expenses based on your Expense & Income worksheet.

5.  Fill in the ‘Budget $’ amounts for your Variable expenses using your Expense & Income worksheet. Can you see expenses that you could reduce? For example, if you currently eat at restaurants twice a week, could you reasonably cut it back to once a week? Can you cut down on your clothing expense, trim your food budget? The goal here is to begin to see how you can reduce your budget estimates to a level that you will be successful at. The amount you reduce your budgeted expenses by depends on the urgency of reducing expenses and your ability to actually reduce spending. Your budgeted numbers should be realistic.

6. Fill in your Financial Goals Budget $ as established in Step 2.

7. Total up all your Budget $ Expenses and Budget $ Goals. Total up your Budget $ Income. If Budget $ Income is less than the total of Budget $ Expenses + Budget $ Goals, then you need to further reduce the Expense Budget amounts.

Get used to thinking and re-thinking your Budget – it will take several months before it is a good fit for you. Even then, in order for your budget to be current and accurate – it will have to change to match your changing financial reality.

Setting Up Your Budget Worksheet

Using the categories you identified in your Expense & Income worksheet – you will now be able to set up a budget worksheet: Download Budget Worksheet

It is important that your budget records are correctly dated. There will be a separate budget worksheet(s) for each month. During the first few months, as you become accustomed to budgeting, there will be changes in items and other things.

Download the Budget Worksheet here

The first items to be recorded are for Income – all of your sources for income are to be recorded and tracked here. You will be recording after-tax income only.

Then you will record the Expenses items that are specific to you – starting with Fixed Monthly and Variable expenses.

The third category of expenses – Infrequent Expenses needs to be handled in a slightly different manner. There are two components of Infrequent Expenses – the first involves the money you will be setting aside every month towards those expenses and the second involves the spending of that saved money. For that reason the headings in this expense category are different from the rest of the categories:

The Saving for Infrequent Expenses section tracks the money you will be setting aside for those expenses that only occur once or twice a year (those that you identified on your Expense & Income worksheet). It will show how much you plan on saving each month (Budget $) towards them, how much you actually put into the Infrequent Expenses saving account (Actual $) and the Difference (Budget $ – Actual $ = Difference $).

The Infrequent Expenses – Spending tracks the total amount sitting in the savings account at the end of the month (New Balance $). In addition, in the column containing the name of each Infrequent Expense lists the total annual budget for each individual Infrequent Expense (this allows you to quickly spot overall performance).

The Balance Fwd $ is the balance as of the end of last month, Actual $ is the amount added to the savings account this month, Mo Applied $ is the amount spent out of savings this month, the New Balance $ = (Balance Fwd $ + Actual $ + Mo Applied) ie

The Saving for Monthly $ Goals are filled in using the financial goals identified in Step 2+

To make sure that all of your money has been accounted for, total up the Budget $, Actual $ and Difference $ for all the expenses and goals and then compare it to the total income budgeted.

On a separate sheet – set up your Financial Goals tracking:

You need to (and will want to) track your Goal performance every month. That way you will see how well you are doing, and get the positive reinforcement you need to stay on your budget.

In the Monthly Financial Goals Section – the Balance Fwd $ is the balance from last month, Actual $ is the amount put into the Goals Saving Account this month, the Mo Applied $ is amount spent from the Goals Savings Account (ie payment on credit card for the Pay Off Credit Cards goal), the New Balance $ is the amount now in the Goal Savings Account.

In the Financial Goals Overview Section – the Total Applied is the amount spent on Goals last month added to this month’s (Mo Applied $), New Balance is the amount now in the Goal Savings Account, and the Goal $ To Date equals Total Applied + New Balance $.

In the Financial Goals Overview next to the name of each goal, is the total amount you are going to raise for that goal. This gives you a quick way of checking on your goal performance.

This is the Third Step of a four-part series on setting up a workable budget. The entire series can be found on the following pages:

Budget Basics – Clearly Identify Your Starting Financial Position – Step 1

Budget Basics – Clearly Identify Your Financial Goals – Step 2

Budget Basics – Setting Up Your Budget – Step 3

Budget Basics – Follow Through or Rinse and Repeat – Step 4