Budget Basics (Part 2): The Mechanics

In Part 1, I wrote talked about the work required before you actually start your budget:

Determining your spending allocation (10-10-30-50) as recommended by Dr. Lynn Richardson or some other allocation based on where you are in your journey; determining your big goal, and then back tracking to create mini goals that move you towards your big goal. I also talked about how to set SMART goals- goals that are specific, measurable, attainable, relevant, and time bound.

THE SHORT VERSION:

  • Create your income and expense list using statements from the last 30 days (all income; plus, what you purchased or paid for and how much).
  • Match each line item in your budget to tithes, savings, incidentals, or bills.
  • Determine how close you are to the 10-10-30-50.
  • Tweak your spending list because chances are you are overspending. Do this at least twice.
  • Figure out where you want to keep your budget (in a notepad, in MS Excel, and/or a budget app)
  • Account for every dollar of income. Decide what to do with your surplus money.
  • Decide how to handle your incidental spending to prevent overspending.

THE EXTENDED VERSION

You’ll Need

  • Pen or pencil
  • Notepad or journal
  • Calculator
  • All bank statements or online transaction histories for last 30 days.
  • All credit card statements or transaction histories for the last 30 days.
  • If you prefer to use MS Excel, CLICK HERE to request a copy of the one I use.  

Create Your Income & Expense List

  • List all sources of income.
  • List the amount you plan to tithe or give monthly. This was discussed in Part 1.
  • List the amount you plan to save. If you have a lot of debt, this may be small at first and that’s fine. The goal is the build the discipline of paying yourself first (after God J). Chose an amount you can commit to and build it up over time, if necessary.
  • List all your spending for the past 30 days using your statements or transaction histories. This is not the same as just calling to mind your bills. One, you may forget something. Two, it doesn’t tell the truth about your spending. You need the see and know the truth.
  • List what was purchased or paid for and how much.

  •         Group like items together and add up your total spending for that item. For example, if you put gas in your vehicle 4 times, total all 4 transactions and put that total next to gas. Do the same for groceries, restaurants, etc. You should have one line item for each expenditure.

    ·         Add up all miscellaneous spending (at local convenience stores, drug store, or dollar store for snacks, hair supplies, medicine, etc.) Lump them together under Miscellaneous, Allowance, or a title of your choosing.

    ·         Add quarterly, semi-annual, and annual bills. Divide them by 3,6, or 12 respectively, to determine monthly amounts. You’ll be setting something aside each month, so the funds are there when those bills become due.

    ·         Skip a few lines and add intermittent expenditures like clothing allowance, car maintenance, home repairs. These are “savings” buckets for expenses that will come up. You may have to hold off on starting them, right now, if your budget doesn’t have enough surplus- but you listed them because they are important. 

Determine Allocation Categories

  • Match each item to the applicable allocation category: Tithes (T), Saving (S), Incidentals (I), Bills (B). Do this so that you can know how close you are to 10-10-30-50 and whether you are overspending in an area.
  • Use your discretion for things that seem like they could fit into more than one category. For example, I need internet to work from home, so it’s a bill for me. If you only use it for movie night, then that’s an incidental item for you. Credit card payments are “bills,” but most of the charges are normally incidental spending. In that case, I put them under incidentals. But if you financed a major repair or something, you may choose to put that one under Bills.
  • Total up each of the 4 categories (tithes, savings, incidentals, and bills and determine what percentage of your income that is. The formula is: category total divided by income total.
  • Do those 4 totals categories add to more than 100%? If so, something needs to go; you can’t spend more than 100% of income- not without serious repercussions.
  • The goal is 10% tithes, 10% savings, 30% incidentals, and 50% bills.

Tweak Your Income & Expense List

  • Tweak your spending to create a surplus (or a bigger surplus. Reduce the number of subscriptions you have and pull back on restaurants and groceries. Put yourself on a reasonable allowance based on your current financial situation (zero is unreasonable). Check your auto and home insurance to see if you are getting the best rate and appropriate level of coverage. This year, I saved over $1,000 by rolling my insurance back to standard coverage amounts verses the high protection amounts my agent urged me to get. Do what is right for you and your family.
  • Go through your budget one more time and see if anything else can go or be reduced.

Complete Your Final Budget

  • If you want to list each item under a category heading, you can do that now. In a notebook or a spreadsheet, lump all your spending items under the applicable heading.
  • If you want my free Excel spreadsheet, CLICK HERE and request it and I’ll email it to you.
  • If you want to use a budget app, there are dozens available- free and paid versions. I have been using Dave Ramsey’s Every Dollar app (the free version) and it has served me well, the last 4 years.
  • You should account for every dollar of income (100%). If you have a surplus, determine what you’ll do with that excess (pay down debt, beef up your savings, and/or give some to your church or charity.
  • Check in on your budget at least once a week to assess whether things are still on track. Pick a night of the week that you will be business minded.

Incidental Spending

  • Determine how you will handle incidental spending.
  • Transfer the full allocation for incidentals to a separate account- a standard checking account- not connected to your bill account.
  • You can leave the money there and use your debit card to cover your incidental purchases like groceries, restaurants, gas, allowance, etc.
  • Subscriptions will likely be on autopay. Make sure you update the direct deposit information to the incidental bill account. Make sure you leave enough money in the account to cover those autopayments.
  • To reduce the chance of overspending, use the envelope or the jar system, by taking out all incidental money for the month and paying everything by cash- all money but what’s allocated to autopay subscriptions.

Conclusion

It looks like a lot, and it is- at the beginning. Once everything is setup, you won’t have to do most of these steps again. You’ll just have to tweak as needed. Most bills stay the same from month to month.

And even though this takes time and work, so does always having to figure out how to make ends meet, figuring out what went wrong, and fixing something you forgot about. That’s not just work, that’s’ unnecessary stress and aggravation.

You have a greater chance of strengthening your financial standing and making progress if you can clearly see what you are doing verses guessing based on what you think is going on.  You need to see the truth.