How To Budget - Part 2: Expenses

Creating a monthly plan for your money is one of the biggest keys to financial success. Living within your means is the only way to create expendable income that can be used to meet your financial goals. But how do you know if you are living within your means if you’re not creating a budget? In Part 1 of this series, we looked at the income side of budgeting. Hopefully you wrote your income number down because we’re going to use that now. It’s time to dive into expenses.

One major thing will make your life much easier when trying to plan expenses in your first budget: track your expenses from previous months. There are percentage guidelines you can follow to try to get close, but tracking your own expenses will give you a much better idea of what you spend. CAUTION: This may be shocking the first time you do it. When I did this for our family, I tracked the previous three months. Among other insights, I found that we averaged $700 per month eating out! Ouch! You will learn a lot about your own spending habits if you track your previous expenses.

Now, we’re going to start with that monthly income figure you came up with at the end Part 1: Income. Write this number at the top of your paper (or put it in as your income figure in your budgeting app). From this point, we are going to work our way down through our expenses, subtracting them from our income until we get to zero (zero-based budget, remember). To

help understand, I’ll use an income of $4,000 as we go through this example budget.

When working down your list of expenses, start with the necessities: Housing, utilities, transportation and food. These four things need to be covered before anything else. Housing would include your mortgage or rent, insurance (homeowner’s or renter’s), and any taxes you may have to pay. Utilities go right along with housing because they’re necessary to keep everything working. However, they can be slightly harder to plan for because they tend to fluctuate. Look at a few months of previous bills to get an average. I like to budget enough to cover a high estimate of my utilities. If they end up being cheaper than that, I reallocate the money to a different expense category.

Transportation would include expenses related to getting you to and from work (primarily): loan payments, insurance, gas, and maintenance. You can get a good idea of how much to spend on gas by looking at your previous months’ expenses. Car maintenance is one expense category that often gets overlooked or underfunded. Your vehicles will need regular maintenance (oil changes, windshield wipers, etc.) as well as tires. You can estimate how often you will need to perform maintenance or buy tires by estimating how many miles you drive per month. The vehicle’s Owner’s Manual will show how often regular maintenance tasks should be performed. Tires have a lifespan usually measured in miles. Knowing how many miles you drive per month allows you to plan for these regular maintenance expenses.

Food is the final of these essential categories. Be reasonable in this category. It is very easy to overspend on food (like $700 per month at restaurants!!), even if you spend most of your food budget at the grocery store. There are a myriad of ways to save on food expenses, but that is beyond the scope of this article. It is easy when creating your first budget, however, to overreact and budget a unrealistically low amount of money for food. My biggest advice in this category: plan out your meals and therefore your shopping. This alone will save you money buying food you don’t use.

So, we add those expenses to our budget plan, subtracting each from our income and keeping track of what is left as we go:

After your necessities are covered, put giving and saving next in your budget. If you don’t, it tends not to happen, or it happens much less than it really should. I often hear (from myself as well), “I’ll save what’s left over.” Your expenses will grow to eat up this extra that should go to saving. If you want to make a habit of saving and giving to others, they need to take a high priority in your monthly plan. Adding saving to our example, saving 10% of our income makes our budget look like:

That leaves us with $1,300 for other expenses after we have necessities covered and put aside some for saving. The key for the rest of your expenses is to create a priority system. If you only had enough money left at this point for one thing, what would it be? That is your top priority. If you had enough money for one more thing… and so on until you have all your expenses covered or all your money runs out. If you get through your expenses and haven’t gone through all your money yet, allocate that extra money toward your financial goals. Maybe pay extra on the mortgage or put a little more into savings. By the time you’re done with your budget plan, every dollar of income should be spoken for.

Some Final Tips on Expenses

1. Build a ‘Miscellaneous’ category in your budget to catch expenses you forget about.

2. Plan some categories (i.e. the ones you tend to struggle with) as maximums: You can’t spend any more than you plan in that category.

3. Don’t forget those large expenses that come out throughout the year. Examples of these are insurance premiums (if you pay them yearly or every six months), car registration fees, Christmas (don’t let it sneak up on you this year). A great way to plan for these non-monthly large expenses is to create Sinking Funds in your budget. A Sinking Fund is simply a separate stash of money which you add a small amount to monthly so you will have enough to pay for a large expense when it comes up. Example: You pay your car insurance yearly, and the total for the year is $800. Add $67 monthly to a sinking fund for your car insurance. In 12 months, you will have enough to pay the premium. This can be, although does not have to be, stored separately from your normal bank accounts. Some people create separate accounts for sinking funds. Personally, I keep some of my sinking funds as cash in envelopes. However, as long as you keep track of it, you can keep it in your bank account. EveryDollar has functionality built in to help you track sinking funds.

That is the nuts and bolts of creating a budget. As you can see, there is no magic to a budget. Creating one is quite simple. The much harder part is sticking to the plan you create. In Part 3, we’ll take a look at some pointers to help you stick to the budget you just made. As always, if you need help with budgeting or turning your financial life around, please contact me. I would be happy to walk through this with you.