So you’re ready to create a budget and start tracking your spending. Congratulations! The steps you take now will put you in control of your own money and set you on the road to building wealth over the long term.
You can create your budget using a spreadsheet on your computer or good old fashioned paper and pencil. It’s up to – it’s yours! I have added a free downloadable budget workbook to the Resources area of my website. Check there if you want a step by step guide, with pre-made templates you can print out and fill in.
Step 1 – Create Spending Categories
Start by making a list of all the things you spend money on. First, list expenses that you have to pay every month. These are costs you cannot avoid. For example:
– rent or mortgage
– utilities, bank fees, cell phones
– insurance – car, health, home
– gas or transportation costs such as public transit passes
Next you’ll look over your past month credit card statements and bank accounts to see other spending. Create categories based on what you bought. For example:
- books, magazines and online subscriptions
- hair cuts and personal health products
- home maintenance
- vehicle maintenance
- courses and/or school fees
- medical costs such as medications, massage, chiropractor
- activities/entertainment such as yoga classes or personal trainer, tickets to events such as concerts
- savings (more on this in Step 2 below)
If you withdrew cash and aren’t sure what you spent it on, create a category called “cash”. You can group similar expenses into one category, it’s up to you. Don’t worry about how much you spent just yet. In this first step, you’re focused on creating the categories. We’ll add some numbers later.
This list will be fluid and you can always add or combine categories later so don’t worry about anticipating future spending. Focus on the most recent month or two.
Step 2 – Savings
When we talk about budgets, we often focus only on how we are spending our money but saving is a key component of a good budget. Be sure to include “savings” as a category in your budget and not as the leftover income after expenses have been paid.
There are different ways to save. You might be in a position to take some of your monthly income and set it aside in an interest-paying savings account. However, if you’re only making the minimum payments on credit cards or other high interest debt, it might make more sense to put that “savings” amount towards the debt. I will be posting an article about whether it makes more sense to save and invest or pay down debt.
Step 3 – Track Your Spending
Now that you have a list of categories, you are ready to track your spending. This is easiest if you do it every day. It will only take a few minutes. Write or enter the amount you spent the day before in your categories. Checking your bank balances and credit card statement on line will help make sure you don’t forget anything. Each day, add a new column and record yesterday’s spending there. At the end of the month, spend a few more minutes to add up the totals in each category.
Step 4 – Record Your Income
Your budget is not complete until you compare your spending and your income. If you have more than one source of income, create categories like you did for your expenses. Track your income and fill in the columns like you’re doing for your expenses.
Summing It Up
At the end of each month, your income minus your spending and savings will sum to zero. You know where every dollar you earned has gone. If you spend just a few minutes each day tracking your spending and income, you will start to feel more in control of your finances and ready to take the next steps towards managing your money as effectively as possible.
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