One of the hardest things I do as a Financial Advisor is try to convince people to do a budget. Budget defined is an estimate of income and expenses over a set period of time. I just finished my 2012 budget. I thought if I share how I did my budget, I might motivate someone out there to do their budget. Will my process work for everyone? Absolutely not; each person, each family must figure out their own way to budget. Here’s how I did mine.
First, and foremost, you must know how much you spent in each budget category in 2011, and then you use those numbers to estimate your expenses in 2012. I utilize several different sources to list my expenses:
Monthly Spending Summary (see image 1) – Two or three times a month I put information from cash and credit card receipts onto this sheet. Make sure you have the right categories for your family.
At year end I review my check book for expenses not already listed, and then I go online and find the total amount I paid to each company that I pay online.
Finally, I look at other sources of expenditures. For example, I have a car book in which I record gas and maintenance costs throughout the year. I go through cable bills, utility bills, and phone bills and add up how much I spent in each category in 2011.
Then in early January I transfer all that data to my Expense Summary Spreadsheet (see image 2). All expenses are totaled on this sheet and divided by 12 to give me a monthly amount spent in each category in 2011. Note that I don’t include money in my “buckets.” Travel money, for example, sits in a separate account. When I spend money on trips, I take the money out of the travel account; I don’t list “travel” as a regular budget category.
Now that I have a comprehensive list of all my 2011 expenses, it is time to do my 2012 budget. First I check the estimates I did a year ago against the actual expenses for each category. I underestimated the cost of my new puppy Zorro. I correctly estimated the gallons of gasoline I would use, but I projected $3 a gallon whereas the actual average cost was $3.29 or 10% more. I take all this information and then make projections for 2012 expenses. Finally I estimate my monthly take home pay income for 2012 and put it at the bottom of the budget (see image 3). For the record, my income will be more than my expenses for 2012.
I asked my best budget counseling client, Sharon, how she came up with her methodology. She said it was trial and error. “I pick a good idea from one source, another idea for another source. I concentrate on what works for me and then do it that way every month.” The take away is that you must do a budget so you know where your money is going. I do it my way; Sharon does it her way; you do it your way. But, do it!