So, you've decided to make a budget. And, you want to get down to business. We get it, but first things first. We recommend analyzing your current expenses before creating a budget.
And, here's why. A budget is simply a plan to direct where your money goes. An understanding of weekly, monthly, and annual spending habits is necessary to create a realistic budget. When you try to make a budget without knowing what your actual current expenses are, you end up with a budget that's less than effective.
How to Analyze Your Spending
We're not saying that you need to track your spending over the next year before creating a budget. Instead, you can use your records to get a view of your spending habits.
That said, it's helpful to track your expenses for a month before committing to a specific budget. Essentially, weekly and monthly data can shed light on the way you're spending money. You can use an app or spreadsheets to track your expenses.
Take the All-Digital Approach With an Online Viewing Portal
If you want to go the online route, check out five of the best expense tracker apps. And, if you're a millennial and/or primarily use your mobile phone for business and pleasure, both Wally and Clarity Money categorize your spending in real-time. You don't have to rely on your memory, receipts, or account statements. Your financial transactions appear automatically in either portal.
That said, you may be concerned about the security of an online portal. If so, relax. Financial powerhouse Intuit owns the popular Mint app. And, Clarity Money is a service offered by the highly-esteemed Goldman Sachs.
In terms of affordability, Mint and Clarity Money charge no fees. While these apps aren't the only games in town, they are free to users. Meanwhile, similar apps like YNAB charge a subscription fee. However, YNAB has a definite advantage: it uses color codes to highlight underfunded categories (yellow) and overfunded categories (red). This helps you see where your money is really going so you can cut down on unnecessary expenses.
Go Old-School with Spreadsheets
Analyzing your spending with spreadsheets can be effective. That said, this approach does require discipline. You have to enter all of your expenses into the spreadsheet on a regular basis. It's easier to do this if you primarily use one method of payment, like a debit card, for most transactions. In such a scenario, you'll just have to import (or copy and paste) your expenses from your online banking account to the spreadsheet.
Using a spreadsheet is a bit more challenging if you pay for many things with cash. You'll have to be diligent about keeping receipts to manually enter the information into the spreadsheet.
But, if you're determined to go this route, you don't have to reinvent the wheel and create your own budget templates. Check out the best free or low-cost budget spreadsheets online.
Plan for Occasional Expenses
Here, we're referring to spending that doesn't happen every week or month, like buying your best friend a birthday gift. You can look at your bank statements and credit card bills from the last year to anticipate these expenses. A list of occasional expenses may include:
- Birthday presents
- Holiday/seasonal gifts
- Homeowners or renters insurance
- Property taxes
- Annual magazine subscriptions
You get the idea. Once you've figured out amounts for each category, add up the numbers. Next, divide that grand total by 12. Then, you can use the resulting amount to factor into your savings plan every month. For example, if you have $600 in occasional expenses, you may want to budget an additional $50 for savings each month. The plan is to have money in the bank when a birthday or other irregular expenses crop up.
Now that you've analyzed your spending habits, you're ready to commit to a budget. Knowing where your money is going can be an empowering thing. As you create your budget categories, you can fill them in with realistic amounts based on the data you've collected. In addition, you can see if you need to make changes in your spending habits to meet your budget goals.