This blog is part two of a multi-part series on budgeting.
In part one of the Budget Blog, I discussed the importance of tracking our income and expenses…how much comes in and from where…how much goes out and to where. We track our finances on paper because most of us struggle with mental accounting. If we don’t write down our expenses, we really don’t know how much we’re cumulatively spending over weeks and months on various goods and services.
Once we’ve tracked our spending for three-four months, it’s time to review, question, and resolve. We objectively review our spending and look for patterns. (It’s OK to be surprised.) We ask ourselves questions such as, “Do I really want to spend $52 a month on cappuccinos?” Or, “Did we plan on spending $357 dining out in October?” Sometimes we’re pleasantly surprised to learn that we spent less on a particular product or service than we thought.
After we review and question our spending, we resolve. When we resolve, we transition from tracking to planning. Tracking helps us to look back and see our financial footprints; it shows us where we’ve been. Resolving is determining and planning where we want to go in the future. It is our opportunity to decide to change course (or intentionally stay on the same course) and lay down tracks in a different direction. A budget is nothing more than your intentional resolution regarding income and spending. Unless you’re self-employed or earn commissions, your income is relatively stable. So the budget is essentially your personal spending resolution. Here are some questions as you prepare to create a budget:
- At the end of four months, did you spend more money than you earned?
- Did you spend more money than you wanted to spend?
- What surprised you?
- Did you spend more money that you intended to on any particular products or services?
- How much money did you save? (The difference between your income and your spending)
- Are you happy with the results?
I know, tough questions.
The next step is to use your tracker to help create a personal budget. The spending categories are the same. Instead of looking back to see where you’ve been, look forward on the calendar and plan where you’re going. For most of your expenses, you’ll take four months of spending in a particular category from your tracker and multiply by three to get your annual expense for that category. Now divide that figure by twelve and you have your monthly budget in that category.
I’ll discuss the next steps of budgeting in part three. Contact me if you want to talk about your personal money tracking or budget planning.