The First Step to Budgeting
Why do so many budgets fail? Because the first step to budgeting is omitted. When implemented correctly, it can make a huge difference. When the first step is neglected, intangible and unrealistic budgets are often created — a recipe for disaster.
So, you ask, what is the first step to budgeting?
Keeping Track of Expenses
It’s that simple. But it still requires a process, which is described below.
Once you decide you want to create a budget, you need a starting point. You can’t accurately and immediately forecast what you will spend in the future if you have no historical frame of reference to work with.
Right off the bat, all you need to worry about is simply keeping track of your expenses. You don’t judge yourself (or your partner if you are doing this together) for what you are spending. Simply keep track.
You may notice that just as a function of keeping track of your expenses, you already become more budget-conscious and will spend less anyway. But don’t beat yourself up if that doesn’t happen. Just keep track of what you spend — religiously.
Yes, those little cups of coffee count too. Record. Everything.
Using a spreadsheet to keep track of your expenses is best, since it makes for easy calculation of expenses and viewing of running totals at a glance.
However, you may not always be in front of your computer, so use whatever means you need to remember/record each day’s expenditures. You can either sit down to your computer at the end of every day and do it, or keep a notebook handy and record your daily expenses so you can update the spreadsheet every few days.
You can, of course, choose to exclusively use a notebook instead. However, it will be more difficult to analyze your expenses as each month progresses and use it as a barometer for how you are doing. It’s possible, but requires more active and repetitive calculator work.
Pictured above you will see a very basic sample spreadsheet format for keeping track of your expenses. You create the categories along the top as you see fit and as fits your lifestyle, and each time you spend money within those categories, you list the expense. A few rows down, a line of running totals indicate you how you are doing.
If you need more room to list your expenses under a certain category as the month rolls on, just add more rows and keep listing.
If you wish, feel free to add extra columns to add the date of each expenditure. It’s up to you.
At the End of Month One
Once you have a month of expenses recorded, take a look at how you fared.
- What did you spend in each category?
- Do you feel it was a typical spending month, or were there unforeseen circumstances that altered the outcome?
- What is an average spending amount that will work for you?
- Are you surprised by any of these spending amounts?
- Are there any spending habits you want to change right away?
Now it’s time to add another row to your spreadsheet: a budget row. Certain fixed expenses will be easy to budget for; others will fluctuate and require some flexibility. Don’t worry about these numbers needing to be perfect right away; think of this row as a work in progress.
Start with a fresh spreadsheet, and keep recording your expenses every day. (This will ideally become a force of habit that will last for months, so get used to it). This month, as you record your expenses, check your running totals against your budget amounts to see how you are coming along as the month goes by.
As you do this over time, you may find that you’ve tapped out your Entertainment budget early on in the month. With this knowledge, you will either reconsider going out again, or will find money from another category of your budget that you anticipate under-spending on this month for some reason. This is your budget — you get to control how it goes down; keeping track of your expenses is a mechanism for ensuring you spend within your means.
Once you start playing with budget amounts, you may also want to insert useful columns for income so you can see how much you are spending versus saving. Pictured here you will see a fuller sample budget spreadsheet, part way through a month:
Continue keeping track of your expenses as you have been doing, and if needs be, continue to edit your budget amounts. No two months are the same, and you won’t have a solid budget after only two months. For example, many people find that the upcoming holiday season wreaks havoc with their budgets. Use the flexibility in your own budget to ensure that you stay on track, possibly by finding other areas where you can cut back to compensate.
The Second Step to Budgeting
Guess what? You can stop at the first step if you like. Why? Because by keeping track of your expenses, you have unwittingly created your entire budget. Congratulations!
Simply continue to keep track of your expenses, record income and tweak budget amounts to make sure your finances balance out the way you want them to each month.