The Finance Fiend

Getting Financial Freedom by 35!

Budgets Part 1: Making the categories. March 3, 2009

Filed under: Uncategorized — Rebecca @ 8:00 pm
Tags: , ,

Its time to collect the stack of bills you left on the table as well as your paycheck.  Its best to collect all receipts, or at least keep track of all expenditures for at least a month to make an accurate budget.

What is my income?

The hardest part for me when starting a budget is knowing how much money we make.  I try to budget monthly because the majority of our bills (utilities, mortgage, student loan, etc) are due on a monthly basis.  The problem is that we get paid biweekly, so some months we get two paychecks and two months a year we get three.  So do I use the money from the 2 check month, or should I find the wages for a year and divide by 12?

For us, the easiest thing is to base our monthly income on a 2 check month.  We were aware of months that were 3 check months, and we planned some purchases based on the fact that we would have excess income in those months.

Lets make a list!

All right, now comes the somewhat tedious action of sitting down and sorting all your bills and receipts.  I like to make three piles: Fixed, Variable, and Infrequent.  Most of the bills I get in the mail go into the Fixed category.  That includes mortgages, gas, water, sewer, and Internet.  I know some people will say Internet is a luxury, but our phone is used through our Internet, so we think of the net as required. Pile 2 has most of the reciepts: food, fuel, home deco, hobbies, and eating out. Pile 3 is smaller, but includes things like home and auto insurance (unless paid monthly or included with the mortgage payment), home and auto taxes, phone service for us, textbooks, gifts, and some purchases like a large appliance or laptop.

Now, start entering all the bills.  You can give them fun colors based on category if you want, but the real important part is include everything.

This is not a budget at this point.  Its simply an inventory of expenditures. It may feel shocking after you add yet another “Large Dr. Pepper” to the list, but its important to not cheat at this.  If you spend $50 a month getting soft drinks at the drive thru, you need to be aware of it.  Saying you only spend $20 is lying to yourself.  Of all the people you could lie to, you shouldn’t lie to yourself.  It will only mess you up.

Now look at what you have done.  You have educated yourself.  You can find out if you spend 10% of your income on home decor.  You might find out that you are spending a large part of your income on going to the theater.  None of these things are wrong, unless you aren’t keeping up.

One thing I like to do is sum all the expenditures/bills and subtract it from the income.  On months when we spend less, the total is black on months we go over its red.  Its adds a visual reminder that I have not been living within my income.

This has been a lot of work, so take a break and come back tomorrow for the next step. And if your break includes another Large Dr. Pepper I won’t say anything.

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