How to Create a Workable Budget – Part 2

Welcome back for Part 2.  We have a lot of ground to cover so let’s get right to it!

In Part 1 we talked about setting up your categories and then figuring out your budget amounts.  Now we’re going to talk about recording all of your expenses, setting your spending goals and how to make adjustments to your budget when necessary.

Step 3) Recording all of your expenses. This is the relatively easy part.  Over the next month you need to make a note of every single expense that you have, especially the cash expenses.  The best thing to do is either have an App that can record them for you or go old-school and use a small notebook to jot them down. This is important so do it well and don’t forget anything.

Once the end of the month comes it’s time to see what the damage is.  Total up everything that you spent and, once you have that number, simply subtract it from the number that you already should have showing your total monthly income.  This will give you one of 2 results.

1) You have a positive number and money left over (yay!).  This is money that you can put towards savings and investments.

2) You have a negative number (boo). This means that you spent more money last month than you earned.

If you’re a #1 congrats!  Use that extra money wisely or, better yet, out it in savings or another investment and then use your budget to save even more next month and the months after. 

If you’re a #2 don’t freak out.  You’re certainly not alone because over 40% of all Americans actually spend more than they earn.  (Hey, why’d you think the economy as such a mess?) What you now know is that you spend too much and, using your new budget, you’ll be able to make the changes necessary to become a #1 and have money left over at month’s end.

Step 4) Setting goals and making adjustments to your budget. Once you have tracked your expenses for a month or 3 you’ll have enough info to start making changes to your spending habits and start cutting down on them where necessary and where possible.

If you have already started doing that it’s time to look more in-depth at your biggest categories and start figuring out how to reduce your spending on them. You can set goals for the big ones and the small ones too.  In fact, sometimes changing the small ones can add up quicker because they use more of your discretionary income in small amounts, which can add up quickly in many cases.

Once you’ve been working with your budget for a number of months you should be able to start seeing patterns of expenses that you can then change, tweak or otherwise adjust so that they don’t break your budget.  You should already be earning more than you spend (or be getting closer to that point) and hopefully putting more in your savings. 

You’ll find that, over time, working within a budget actually frees you from a lot of stress and anxiety that you might have had before, living paycheck to paycheck and not really knowing where your money was going.  Keep at it, use the tools you now have, and keep coming back to see us for more financial tips and advice.

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