Budgeting basics: How to set up a budget

A few months ago a good friend of mine told me she had started meticulously tracking every single one of her expenses in order to figure out her budget, pay down debts, and start saving. She inspired me to get a better grip on my personal finances, which meant I had to learn how to make a budget, and more importantly, how to stick to it.

Here are a few easy steps to setting up a budget:

1. Track your expenses. All of them, even those small coffee purchases or a candy bar from the vending machine. If you don’t know where you’re spending your money you can’t figure out how much of your income to allocate to each category, and where you have room to cut back.

2. Figure out how to track your money the best way that works for you. Right now I’m using Mint to track my purchases, savings, and to set goals. I tried Mint a long time ago and didn’t stick with it, mostly because I thought the interface was lame and confusing, but it’s gotten a lot better. If you prefer writing everything down by hand, that’s great. Lots of people use Microsoft Excel to track their expenses, or other online tracking tools like Budget Tracker and LearnVest. Whatever you decide, make sure to stick to it & keep track of every penny!

3. Break down your spending into groups that make sense to you. Some basic groups would be: Household, Food & Dining, Bills, Gym, Auto, Education, and Entertainment. Within each of these categories you can further specify where you spend your money. For instance, did you spend your money in ‘Auto’ on gas or insurance? I love this feature of Mint because I can see my bigger categories, but then click on them to see each transaction and where exactly I’m spending money on items that fall under Food & Dining like this:

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4. Set realistic budgets. Do you spend a lot of money on food but not a lot on transportation? Well then don’t allocate 15% of your total budget to food and 10% to transportation. Make sure your budget reflects your individual lifestyle & spending habits. If you like to go to the movies every week, ensure your entertainment budget reflects that or look for alternatives such as Netflix or Hulu to cut back a bit on your splurges.

5. Determine where you can cut back. For me, the number one area I need to cut back on is dining out. I have no problem spending money on groceries, but the restaurant piece of the pie bugs me. When we combine our budgets I’m going to try out putting a little money aside for fun restaurants and eating out, but if we’re just going to bars & eating out that way I’d rather spend (or save) our money elsewhere. Next month I’m going to focus heavily on limiting eating out, and saving a bit each week for a nice meal out with A or friends.

6. Pay down your debt. The way to do this is to know exactly where in your budget you have wiggle room to take from one area to put towards your debts. Dave Ramsey encourages everyone to use the debt snowball plan to reduce debt and increase savings. It makes a lot of sense (cents?) to save little by little and to put all of your extra cash towards savings or paying down debt. He also encourages people to pay down their smallest debt first, although I know this can be a heavy topic with a lot of opinions. Do what feels right to you, as long as you’re paying down debt you should feel great about your progress.

7. Start saving. If you’re starting off with no savings, a great goal is $1,000. From there you can continue to add slowly to your savings to build up a nice emergency fund. Typically, 3-6 months worth of expenses should be saved in order to have a nice cushion. Right now I’m saving towards a few different goals, which you can see here. I feel pretty comfortable with my finances and will be slowly working towards my goal of 6 months living expenses for my emergency fund, but also want to save for vacations and a bit for the wedding.

8. Remember your goals! This is something I struggle with when I’m in need of an afternoon cup of coffee, or am invited out with friends for drinks or dinner. It’s hard to say no to fun things, which is why I’m going to start implementing a “fun fund” for those occasions. Once the fund is up, I’m done. I also need to remember why I’m saving: to have a better life, be more financially stable, pay down student loans, and be more creative with fun activities that don’t cost an arm & a leg. It’s a work in progress, but I know as I slowly implement these changes I’ll see more and more progress towards my goals.

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