23 Feb 2010

Step by step of your first budget - What Would I Do Differently?

I am now in our second month of living adhering to a budget that I’ve set up. Some lessons I learned so far moved me to write this post.

Knowing what I know now – how would I set up my very first budget?

1. Collect / download itemised bank statements for the last two months

2. I would still ask a friend to help me identifying actual spend based on 2 months of bank statements. It’s way too easy to trick yourself into declaring some of your spending a one off or simply “not seeing” them – you need a help of an outsider!

3. List everything you expect to be paying for in the next 12 months – this one is probably the most important step. Listing all irregular exercises contributes the most to your success.

4. Estimate how much per month you need to save to be able to pay for all your irregular bills on the day each one is due.

EVERYTHING that needs to be paid less often than once a month should be listed as an irregular expenses and a monthly contribution towards the end amount needs to be allocated an a monthly basis

5. Create a savings account where you will be putting all the “irregular bills” money

6. List out all your regular expenses and group everything into following broad categories:

- fix costs (everything that you can’t scale up or down painlessly. This includes most of house related bills, memberships you can’t cancel, insurances, child care

- variable costs: groceries, going out, lunch at work and anything that can be cancelled / amended within one month. Estimate your average spend based on information you were able to get out of your bank statements

- savings: this category should include savings for all your future irregular bills payments, saving for Christmas, birthdays, holidays, emergency fund, etc.

- debt re-payment: could technically sit in your fix cost bucket but if you are aiming to combat your debt pro-actively separating it out into a special category would make more sense as it will increase your focus and hopefully motivation

- slack – if you just starting with money management you should be left with some money left over and not accounted for in any of the categories above.


7. Decide how you want to budget. There are probably more than two approaches to financial planning but the most popular ones are: 4 envelopes and zero budgeting. The idea of 4 envelopes budget is to allow you some flexibility in daily spending without going overboard. Zero budget forces you to budget 100% of your finances.


So if you decide to go with zero budgets you will re-allocate the money left in the “slack” category to any of the other categories: you may decide to overpay your debt payments, save more for Christmas, spend more on groceries, etc. If you were to go with the 4 envelopes you will divide your slack by 4.3 and add the resulting amount to your weekly spending allowance.


8. AUTOMATE your payments for as many items as technically possible! Bills, transfers into your savings account, debt re-payment – everything! It DOES make a difference!

9. give it a go for a month. I personally found it very useful to track all my spending for the first month of our budgeted life. It helped me to stay on track but also helped me determine where I over or underestimated spending.





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