Budgeting 101: Step 1- Where’s your money?

Today I received the question “Wow, how do you do your budget?  I don’t even know where to start.  Can you help me?” and so I’ve decided to write a series of posts on the “how to” of budgeting as I understand it.  Hopefully it will be of value to more people who stumble upon it in the future (or DH can refer to it should anything happen to me so he knows how to pick up where I left off) and you can use it to evaluate and possibly improve your financial situation.

I think the first disclaimer is not to compare yourself to anyone else and try to match up to anyone else’s budget.  Stringent comparison is not worth the stress of trying to measure up when you can’t get your weekly grocery budget below someone’s monthly budget (unless you’re willing to focus on incorporating their strategies or ideas to lower your own budget realistically) or patting yourself on the back because you don’t spend $2000/month on tech accessories (yes, that’s a different guy I know).

The first step to a successful budget is knowing where your money comes from and where you spend your money.  When DH and I first married we started to track every expense daily on an excel spreadsheet.  I’ve heard this advice from many gurus and I think many people fail to take this first step because it’s really time consuming.  At the end of a week with pad and paper many people lose whatever little desire they had to budget in the first place and opt to just keep spending without a record as they’ve been doing.  I find tracking every expense keeps me from spending anything at all many days each month.  It’s kind of a pain to dig out the pen and paper from your purse…

Actually, we continue to track our regular income (our checks), passive/additional income (overtime I work, dividends from our stocks, if we had rental income it would go here, gift money for birthdays/holidays, bonuses, etc), regular expenses (our monthly budget) and additional expenses (unexpected emergencies mostly).

The Shortcut to Success

One way to cheat on this step is to review your bank and credit card statements for 3-6 months and review what you have been spending on.  If you are taking a lot of cash from the ATM and can’t account for it then you have a problem.  However, if you know exactly what you have been spending on and what areas of your life eat up the most cash than it’s easy to see where you may be able to make cuts or where you might want to make cuts or substitute cheaper alternatives.  Check old pay stubs and bank records to record your income sources.  You can compare and see if you can account for every dollar being spent (or at least 90% of them would be a great start). 

WHY is this step necessary?  If you don’t know where your money comes from and where your money goes you can’t possibly make a “budget”!!!  It’s impossible.  If you do make a budget, it WILL fail because you’ll make some categories too stringent (why on earth did you think you could eat on $100/month for a family of 4?) or too loose (oh yeah, we “need” $200/month for candy bars- you haven’t seen me pms yet…). 

Furthermore, let me give you some real life examples of unconscious spending some of our friends have mentioned to us and how it affects their budgets unbeknownst to them.  This really shows WHY it’s so important to know how much of your money is going out and where it is going.

The Movie Buff

1) One friend and her husband go out to movies EVERY week in the theater.  Sometimes they go twice/week.  They also pickup new movies at Walmart (on sale for $9.99) once or twice a month to add to their large home movie collection.  They were shocked to find out we had not been to a movie in over a year and that our last dvd purchase was a $1 copy of “The Notebook” at a yard sale.  “The Notebook” had a lot of sentimental value to us when we saw it while dating and still makes us cry when we watch it.  It was still in shrink wrap!  Going out to movies has just become a habit for them.  Normally, they’ll take turns picking what they see in the theater which is why they often end up at 2 movies in a single week (if a great guy movie and a chick flick are competing for their attention in a single week)!

Cost on a weekly basis: $17/two evening movie tickets, sometimes $35 for 2 movies

Cost on a monthly basis: $40/home movies and $105 at the theater- $145

Cost on an annual basis:  $1740

These guys just borrowed $1500 for a moving van so they could upgrade to a newer apartment because they didn’t have the cash to move.  It is hard for DH and I to see them spending like this.

The Social Butterfly

2) Another friend and her boyfriend like to go out and be sociable at the bar.  As she was going through their credit card statements online, she realized they spent nearly $500 last month out drinking.  She says this is a typical spending pattern for them ($50-$60 eight to ten times/month).  She was shocked to hear DH and I don’t generally spend one tenth of that in a given month.  While we do plan to increase our social outings next year, we don’t plan to spend $500/month.  We have a mix of activities including meals out with friends (not every month and not always for dinner which is more expensive), going out for a drink at a bar without a cover charge, a bottle of wine and cheesecake at home ($10 from the grocery store), a fancy coffee dutch date with friends ($5/each) or meeting up to do local activities at low cost events.  In the past we’ve also brought store pizza to watch the game at a friend’s house, invited friends over for board games or video games nights, and rented a movie for everyone to come watch offering wine and cheese/cracker appetizers.

Monthly cost of our friend’s social life: $500

Annual cost: $6000 

And why did they have to stop maxing out their ROTH IRAs this year?

Again, the purpose of this is not to judge others’ spending.  Certainly you don’t have to display your budget in a public forum or get anyone beside your immediate family’s approval.  The principle (in my opinion) is that every dollar should be consciously spent.  It’s important that you realize that spending is a choice that’s made and not some unfortunate circumstance where all of the money in a given month has leaked out of the bank account and into a creditor’s hands.

So, the challenge is this: Do you know where your money is???

 

Try to track every expense (or backtrack it with credit cards, bank statements, voided checks) for a week.  Using a pen and small notebook in your purse or on your person wherever you go will keep you honest.  If you wouldn’t want to pull out your notebook and write it down, do you really need to spend that cash?  Track expenses for at least 3 months to get a good feel for average expenses and really be able to create a solid budget!

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