Wednesday, October 22, 2008

Make A Budget

#17 Saving Money Tip - Make a Budget. The last tip talked about putting money away for savings. While I said that you should come up with an amount that you put away each month, I didn’t tell you how to figure out what that amount will be. You might want to put $1000 into savings each month, but if you only make $2000 each month that might not be possible. After all, you need to pay for a place to live and eat, too. The best way to figure out how much you can afford to save each month is to make a budget. I know that word scares a lot of people. But it shouldn’t. All it is is a plan on how the money you make will be spent. There are some categories that almost everyone spends money in. Others will be personalized to just you if you spend money on a specific hobby or something similar. Let’s try to set up a budget. In general it seems to make the most sense to have a monthly budget since that’s how many of the bills we receive are set up. The categories I generally use are:

Utilities (such as gas, electric, and water)
Cable TV/Satellite
Repairs (home)
Repairs (auto)

Your categories will be different. You may not have a school category. You may not have a gasoline category if you don’t own a car. Perhaps you have a Transportation category because you take the bus or train everywhere. You may buy stamps every month for your stamp collection, so you would have a stamp category. You get the idea. Notice that I have a category in there for savings. If there is no category, then you will not have any money allocated to save.

Once you have your categories, figure out how much you can spend in each category. I like to start with income. Let’s say we make $4000 per month (after taxes). We need to figure out how to break down that $4000 into categories including savings. Let’s come up with some figures for our budget

Rent/Mortgage $1500
Utilities (such as gas, electric, and water) $500
Phone $50
Internet $25
Cable TV/Satellite $50
Food $500
Gasoline $100
Insurance $100
Travel $100
School/Classes $50
Clothes $50
Entertainment $50
Gifts/Holidays $100
Repairs (home) $50
Repairs (auto) $50
Miscellaneous $100
Savings $625

When you first make a budget, many of the items are estimates. Of course your rent/mortgage is usually known and that’s generally the biggest chunk of your budget. Unless you keep very good records, the other categories are your best guess on what you spend.

After you make your initial budget like we did above, it’s best to keep records for a few months on your actual spending. Remember that things like insurance that are usually billed twice a year need to be taken into account on a monthly basis. And things like gas and electric change depending on the season. I like to look at past gas bills and add up the previous years’ worth of bills and then divide by 12 (adding a bit more in for cost increase). Once you keep track of your spending for a few months, you can tweak your budget to more accurately reflect your actual spending.

In Real Life (IRL) – I have a budget. I started making them when I was single and earned an income. Now I do it for our family. Mine are always written down in an Excel spreadsheet with formulas so I can easily make changes to one category and have it calculate how that changes the bottom line or my savings. I set it up so my income minus all of the budget categories equals the savings category.

Since this is my IRL section, I will admit that I have never truly tracked my expenses for a month. I do know what it is for the big categories of mortgage, utilities, insurance, and classes. But my food spending is still an estimate as are my clothes and entertainment spending. Even so, I know how much in general I can spend in each category and I make sure that I write a check each month to go into a savings account. Therefore I do save the same amount each month and the rest generally gets spent.
Remember that the budget is a guide. There is no way to follow it exactly. Gas prices change on a daily basis. Utility costs fluctuate, as do expenses for gifts and auto and home repair, as well as other categories. Even so, the exercise of making a budget will go a long way into making you realize how much you can spend in each category. It will also give you the ability to tweak each category. Want to eat out once a month? Well, then get rid of your cable tv. Want to join a gym? Well, then, spend less on going out (entertainment category).

I like to set a goal on how much savings I want to do each month. My savings goal is $500 per month or $6000 per year for our children’s college funds. So I never take money from that category and put it in a spending category. That’s why I suggest trying to figure out how much you’d like to save each month and then adjust your spending by using some of the other tips I’ve given you to save money.

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