How to prepare a budget
How many of us dread the last week of the month, when our bank balance gloomily predicts that we have just a hundred bucks to survive on, and we realize that the phone bill is still unpaid? For all those who strive to stick to their budgets, and fail, here are few simple pointers that can help you create a good budget, stick to it, and hopefully save a few bucks more than you would have otherwise.
Before preparing the budget –
1. For a couple of months before you finalize your budget, keep a track of your expenses – all expenses. Everything from your rent, to the coffee you had at the mall. You can do this retroactively over the past couple of month’s expenses as well, but that involves going over all your bank accounts, card statements, check stubs, which is a tad too tedious. Instead, it is a lot easier to track expenses as you make them.
2. List expenses that you have no control over, and are fixed every month. E.g. rent, utility bills, insurance premiums, loan payments. Create categories for each of these expense types.
3. Categorize variable expenses into not more than ten categories. These include expenses like groceries, eat out, movies etc. Be sure to add a ‘miscellaneous’ category to catch infrequent expenses like the new guitar processor you wanted, or the perfume you got for your wife on her birthday.
Preparing the budget –
1. Decide how much green you want to bag every month. Subtract this amount from your monthly earning to figure out how much money you can afford to spend. Let’s call this “amount to spend”.
2. Assign “expected expense” amounts to each of the categories you have created. Expected expense amounts are the expenses you have tracked over the past couple of months. E.g. If you have spent about $200 on groceries per month, write 200 as actual expense under ‘grocery’ category.
3. Once you have all the expected expenses amounts, make a total of your expected expense. If it is lesser than “amount to spend”, good news – your budget is ready! You are already meeting your target savings. You just need to track your budget every month to make sure your spending habits are consistent.
4. If your expected expenses are more than the ‘amount to spend”, you will need to make some changes in your spending habits. Take a closer look at the variable expenses. Is there anything that you can cut back on? Maybe go for a cheaper grocery store, or rent movies instead of going to the movie theater too often? Or pack your lunch instead of going to the office canteen? Decide what you can best cut back on, and tweak the expected values in those categories till your expected expense becomes equal or less than the “amount to spend”.
Tracking the budget –
1. Prepare a fresh sheet every month with all the categories and expected expenses.
2. Every couple of days, write your actual expenses against each category. It is easier to do this as often as you can, when the expenses are fresh in memory. Just jot down the amount spent with a comment on where it was spent, under the correct category. E.g. under groceries – shopping at Giants, date 2/13, $70. Make a quick total and figure out how much balance you have in the category.
3. This step is important – with about ten days left for the month end, check the balances in all categories. You might have overstepped some, and have more than expected balance elsewhere. Steer your expenses for the rest of the month based on how much balance you have remaining.
4. With practice and discipline, you will learn to not only live comfortably in your budget, but also to save a few bucks here and there to live above it.
Tools for budgeting –
1. Pen and paper, at the simplest. A little tedious to maintain and keep copies for future reference.
2. If you have a computer, MS Excel. You can do miracles with simple formulae and calculations. I prefer this the most since I have total control on my budget, without having to do any manual calculations.
3. If you have an Internet connection, Mint (https://www.mint.com), BudgetTracker (https://secure.budgettracker.com) are two examples.