Typically when someone decides it is time to put together a budget, one of the first steps they take is to find the right tool to use. This could be an app they download on their phone, a software program, an excel spreadsheet, a template they’ve found on Google, or even a Big Chief tablet and a crayon. However, none of these are the right first steps in creating a successful budget...it starts with the data.
When I provide budgeting assistance through our Financial Coaching program, the first thing
I tell our clients is not to use a budget. Yep, you heard me right. For the first month or so I
want to collect data, not try to plug numbers into a predesigned template that may not be the best option for their lifestyle. That's like trying to force a round peg into a square hole.
If you Google “budgeting worksheet”, you come up with a little over $4.4 million results. This is because budgeting is not a one size fits all issue. I’m sure the first person that uploaded their budget template onto the internet thought theirs was fantastic. Then someone else came along with a tweaked version, and so on and so forth. It’s important to personalize the tool you plan on using.
However, most don’t really know where to start when creating something from scratch. They find it daunting, and even a bit overwhelming... That’s where the data collecting comes into play. First I recommend tracking all of your spending...every dollar. By logging where and what you are spending, it provides a much clearer picture of the areas that need some work. There are two types of spending you will need to track…non-variable and variable expenses.
Most of the non-variable spending is pretty easy to track...mortgage/rent, car payment, car insurance, cell phone, etc. These are the expenses that don’t really change much from month to month. The areas I see people having the most trouble are with their variable expenses. These are things like groceries, dining out, impulse buys (think of those Girl Scout cookie tables outside of the store), and even your electric bill.
Now the electric bill fluctuation is a pretty easy fix...maybe. I live in Texas. Texas gets crazy hot in the summer. I don’t like to be crazy hot so my air conditioner may run 24/7 during the summer months. Obviously this will increase my kilowatt usage, and as a result, increase my bill for those months. Setting up average billing allows for those higher usage months to be spread over the rest of the year. Check with your electric provider to see if average billing makes sense for you.
Groceries and dining out seem to be two of the toughest categories for people to gauge. To help stay on track, consider meal planning with items on sale. If you’re really adventurous, trying planning ahead for the entire month and purchase items you’ll need in bulk. Often times this offers a lower price per ounce, ultimately savings even more money.
When shopping, make sure to keep track of your buying categories separately. For instance, a trip to Walmart may include food, toiletries, clothing, and even a new tire. Make sure you separate the expenses and not lump them all together as “food”. The best suggestion I can give is to separate the items before checking out. For example, scan all of your grocery items and pay. Then your toiletries. Then cleaning supplies...you get the idea. It may take a few extra minutes at the checkout but will save you the headache of trying to decipher abbreviated codes on the receipt later.
After tracking your spending for a month or so, categorize the expenses and see how it looks. Break things down into categories like food, clothing, personal care, child care, vehicle payment, vehicle insurance, rent/mortgage, etc. Try not to use descriptions like "other" or "etc" as line entries. If you are using a template as a reference, make sure to only include those catergories that pertain to you. Need a starting point? Here's one that will give you a few ideas and keep a running monthly and annual total. Next, compare your spending with recommended expense ratios to see how you’re doing. Just remember, these are national averages... your numbers may not be right on target. You may spend more on groceries and less on dining out and entertainment. The important part is that your spending does not outweigh your income.
The USDA published a recommendation on grocery expenses, and the American Consumer Credit Counseling Service has some overall recommended expenses in their Personal Finance Workbook. What can you do if you find that you are too heavily weighted in a particular area? Can adjustments be made? Should you cancel certain services? These are all important things to consider when trying to reach the bottom line.
So, how can you make adjustments to your variable spending? Well, it depends. For one client it was as simple as ordering groceries via a grocery pick up program, like Walmart's Online Grocery service. You can order online, pull up, and the groceries are brought out to you. This eliminated any spontaneous items from being placed into the cart and ultimately saved this particular client a whopping $125 for the month.
Another client noticed she was throwing food away because it was going bad before she could use it. A food delivery program like Plated or Blue Apron could help. This allowed her to have the right amount of food delivered and not have to worry about wasting any it. It also kept her grocery bill pretty level since there was not much fluctuation in the price, which you can often see when purchasing groceries on your own.
Once you have the numbers in place and understand what you’re working with, finding the right tool to use will be rather easy. Most apps can be customized to meet your particular needs and allow for on-the-go convenience. Some offer importing of expenses while others may not link with your bank. Which is the best? Well, that all depends. There are many versions that charge a monthly or annual fee, and many others that are available for free. Depending on the complexity of your situation will dictate which will work best for you.
Finding yourself a bit overwhelmed? Many find it easier to hire a professional, at least initially. If you fall into this category, there's no shame in your game. You do you, and let us handle your finances-