How to build a budget

20131013-120950.jpgAJ: Budgets don’t often receive a great response. They require planning, focus, dedication, and a small amount of ignoring what you want in lieu of the greater good. I’ve been talking about retiring since I was in college. Being able to sit by the ocean and drink for the last 20 years of my life isn’t just a goal for me, it’s kind of the main thing that gets me up in the morning. Structure now means flexibility later, and that’s what is ultimately important to all of us.

We have so many friends who won’t even consider a budget. You don’t have to make a lot of money to need a budget. In fact, if you don’t make a lot of money, you need a budget more than anyone! Not knowing how you spend your money is dangerous, and not caring how you spend your money is downright irresponsible.

KJ: Budgeting often conjures up negative emotions with certain feelings of helplessness, but when tailored to your goals, it can turn into a positive, empowering exercise.

There is no such thing as a ‘perfect’ budget that will work in all instances. Everyone has expenses that crop up unexpectedly (whether that’s the cell phone shattering or a frustrating power outage that spoils your food). Planning for the unexpected (or ‘everything else’ as we call it) each month gives you the freedom to take those extra items head-on without resorting to dipping into savings or putting things you can’t afford onto a credit card. The particular expense may not be recurring month-to-month (surely you aren’t breaking your phone each month), but there always seems to be something that comes up. This ‘extra’ we plan for becomes our recurring, non-recurring expenses!

See our earlier post on Budgeting: a very good place to start for some tools available to help.

Be specific. Start by identifying your fixed expenses: utilities (water, electricity, gas), cell phone, food for animals, home (mortgage, insurance, real estate taxes, rent), and debt payments (student loans, car payment, line of credit, etc.). Then, identify your variable expenses. Instead of having one single budget for ALL remaining expenses, try breaking out food and dining into specific groups: restaurants, groceries, fast food, coffee, etc.

AJ: For us, broad categories wound up providing too much flexibility. I had a hard time keeping track of all of the things that were supposed to hit a category during a month that I was forgetting about. I would inevitably wind up forgetting about our cell phone bills and would plan to spend all of the remaining money in the ‘everything else’ category on something else, meaning we would ultimately be over budget in that category. If you’re never impulsive, maybe broad categories will be fine for you. But if you’re like me and you pick up stuff you know you need but didn’t plan for, get more specific to save yourself in the long run.

KJ: Sweep anything you don’t spend into savings. You can balance to the penny or you can round to the nearest $25 (or whatever works for you).

A sample budget could look like:

  • Income: $3,000/mo after-taxes
  • Expenses: $2,675/mo after-taxes
    • Food & Dining:$500
      • Groceries: $300
      • Restaurants: $150
      • Fast Food: $50
    • Auto Payment: $300
    • Mortgage: $1,000
    • Student Loan: $200
    • Utilities: $250
    • Phone: $75
    • Shopping: $100
    • Everything else: $250
  • Savings: $325
    • 401k/IRA/Retirement: $250
    • Other savings: $75

Not that I am emphasizing any one particular budget category over another since each person’s budget could look substantially different, but the above outlines some of the important categories that are quick to identify when just starting your budget. It’s important to take the time to learn how you spend, so you can learn where you can be flexible and where you can’t.

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5 thoughts on “How to build a budget

  1. Straight talk, helpful detailed look at a possibility. For me, paying attention is the first miss most of us have. If we don’t know what we have, we can’t even begin to make a plan, so stopping and looking and planning is important.

    • Paying attention to the details of what income is coming in and what expenses are flowing out is a must. It’s a huge first step, and paying attention will allow you to see how much you may have been missing!

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