Mel’s Musings #3: Budgeting Basics

Happy Wednesday, everyone!

In the last Mel’s Musing’s segment, we discussed debt and recovery. Today, I wanted to discuss budgeting, which is critical to the financial health and stability of any independent person. Whether you’re trying to pay your debts down, planning to buy a house, or even saving up for a nice vacation, these simple strategies to create your own tailored, customized budget will help you to see where your money is going (and how you’re spending it).

Sound manageable? I promise, it’s easy. All you’ll need to get started is a piece of paper and a pen(cil, whichever you prefer). I’ll touch on apps and other methods of tracking your budget at the end of this article. Let’s get started, shall we?

1. Track Your Expenses

‘Expenses’ in this context relates to the money you spend on things – food, gas, entertainment, et cetera – and in order to start saving money, you must first be privy to how much you are spending to be able to adjust accordingly.
First of all, I need you to gather all of your receipts, bills and bank statements for the past three (at least, if possible) months. If you have access to these items for the past year, even better – the more information you can gather about your spending habits right out of the gate, the better. What we’re trying to achieve here is some pattern recognition – where is your money going on a consistent basis?
Once you’ve gathered all of this material, first separate it into months, and then into categories. My system for breaking down expenses looks like this:
-Sort by month
-Sort the months into bills, credit card receipts (I like to do this by individual card; however, even lumping them together will work), ATM receipts from withdrawls, debit receipts, and other)
-Sort these into :

• Loans
• Utilities
• Medical and dental
• Automobile expenses
• Groceries
• House expenses
• Entertainment
• Taxes

Once you’ve done all your sorting (I promise, that’s the worst of it), tally up the totals for each month. When you have these totals, take this one step further and sort your spending into “fixed” and “flexible” expenses. A fixed expense is something that you can count on being consistent month after month – a car payment or a phone bill, for example; whereas a flexible expense is something that varies from month to month, including grocery bills and entertainment expenses. This will give you an even more accurate picture of what you’re spending and where.
Finally, take the sum total of each month, and add 10-15% to it as a “safety net” fund, and list it as a flexible expense. It’s always a good idea to have enough money saved up to get you through any unplanned events that might occur financially.
This is a great (free!) downloadable template that you can tailor to your own specifications to create an organized and effective expense report.

2. Figure Out Your Income

Knowing what you spend is only useful if you know what you’re making, too. To figure out what you’re actually bringing home, tally up all of your net income – from your job as well as any ongoing side work you may be doing, including babysitting, freelancing, tutoring, and et cetera. Make a note of what you brought home (net) per month, for every month’s worth of expenses you have accrued. I find it a useful tool to keep all of my paystubs in a binder, at least for a year.
To this effect, if you’re looking for ways to earn extra income, I recommend looking at options that allow you to work from home on your own time – this summer, I made some decent money just by writing freelance blog articles. There are always ways to increase your cash flow, and taking on side jobs is an accessible and lucrative one.
If the idea of increasing your money stream intrigues you, I recommend checking out Elance, Craigslist, Kijiji, and UsedVictoria (if you’re local).

3. Set Some Budgeting Goals

So, now that you have a good idea of what you’re spending and what you’re earning, the next step is to subtract your monthly expenses from your monthly income.
If the number is positive, that means you are saving more than you are spending! Awesome!
If the number is negative, that means you are in a deficit and overspending in relation to your income. Not optimal, but fixable.
If the remainder is what you would like to save per month, stop here – your budgeting is already on point; however, in most cases, you’re going to want to save more, in which case the following applies to you.

Simple ways to save more include taking a look at your flexible costs and begin to trim from there. Can you do without that daily latte? Perhaps you can invest $8.00/month on Netflix instead of $25.00 to go and see a movie a couple times a month. A library card is usually under $10/year and will give you access to thousands of books, movies, and magazines. Simple things can add up to savings well over $100/month without even trying too hard or feeling like you’re being deprived of anything. Be creative, and once you hit your savings goal (don’t forget that safety cushion slush fund!!), stick to it. Remember, it takes roughly three weeks to form a new habit, and before you know it, being more frugal will just feel right.

4. Track Your Budget Continuously

Budgeting is really only a useful tool if you stick to it – so make sure that you do, by tracking your spending and income on a continuous monthly basis. Choose a day every month to take an hour or two dissecting your expense report and tallying up your numbers. Take the time to evaluate your progress, set (or reset) goals, and brainstorm new ways to save money and accomplish your goals. It takes diligence and discipline; however, it will be well worth your time in the long run. Nothing feels better than paying off a long standing debt to make room in your finances for a vacation, a new car, or a well-deserved treat (my favorite indulgence is a good manicure) for yourself.

There are a wealth of budgeting apps available for smartphone users, such as iReconcile, Expenditure, MoneyBook, Toshl, and Mint, as well as You Need A Budget, which can be set up on your PC and taken with you on your smartphone to allow for real-time input of expenses. Now, I’m part of the iPhone generation, but I personally prefer pen and paper to any budgeting app; however, the important thing here is to be diligent and make sure that however you prefer to keep a running log of your budget, that you sit down and get it done. Make it accessible, make it comfortable, and make it work for you!

5. Remember To Have Some Fun!

It can feel overwhelming and constricting to stick to a strict budget; however, as important as it is to take care of your financial health, it’s equally important to take care of your mental health. If you’re just starting out and you have every penny accounted for, don’t fret-there are tons of free and low-cost activites to keep you occupied. Take a hike, explore the nooks and crannies of your city’s downtown, look for free museum exhibits or art galleries…the possibilities are endless! I like to lace up my shoes and go for a long run when I’m broke and bored – and then come home to watch Netflix (I recommend ‘Sons of Anarchy’ and ‘Nip/Tuck’ for TV shows – they’re both totally addictive, and as I mentioned before, Netflix will only run you $8/month for all the TV and movies you can watch) with my fiancé and our dog. You can even try searching “free things to do in __________” online. A quick google search for “free things to do in Victoria” pulled up hundreds of results.

Frugal can be a lot of fun!

Recap:

Track your expenses, then track your income. Pit the two against each other and look for either a surplus or a deficit, and use that information to create attainable savings goals. Create a budget and stick to it. Cut down on flexible expenses and start actively saving your money. Remember to have fun while you’re at it!

Sticking to these simple budgeting tips will help you reach your goals in no time – you’d be amazed at what you can do in a year!

If you have any more questions regarding budgeting, debt, or personal finances, please feel free to contact me – I’d be more than happy to get you started on the right track.

For now, have a wonderful Wednesday!

-Mel