1. Study your spending habits
This is the easiest stage of the process. Jot down everything you earn per month and per year. Start with your wages. If you are paid biweekly, multiply your regular paycheque by 26 then divide by 12 to get your monthly income. If you tend to receive money in one lump sum annually, divide the amount by 12 to get your monthly total. And don’t forget to include other streams of income, such as child support, bonuses, gifts and rental income. For more ideas, look at the How Much Money Do I Make? section of our sample budget.
2. Figure out how much you really make
Next, take a stab and guess how much you’re spending every month. You probably already know what the monthly mortgage is or how far you need to reach into your pocket to pay for utilities. But what about the mani-pedis, lunches out or pre-dinner party trips to the liquor store? Write your guesses under the Monthly Amount column of the What Should I Budget For? section of our sample budget.
To track your current spending, gather up all your routine expenses from the last few months. Think telephone bills, hydro, auto insurance, child care and anything else you pay regularly. Then, collect your variable expenses like dry cleaning or coffee on the way to work. How you do this is totally up to you. Some people like to write these amounts into a notebook, use a mobile app or punch them into the computer at the end of the day. Others grab bills and receipts and stuff them into an envelope to be tallied at the end of the month. Whatever you choose, don’t change your spending habits just yet. Be Zen about it: Right now, you’re just observing.
At the end of the month (or as you go, if you decide to use personal-finance software), sort by type of expense and add everything. Write each final tally in the Actual Amount column of the What Should I Budget For? section of our sample budget.
3. Make a plan — and get what you want
Now to make those luxuries happen. After you’ve tracked your spending for a month or so, evaluate the results. How does your spending compare to your earnings? If you’re still in the black, maybe you just need to make a few changes. But if you’re spending more than you earn and dipping into credit to make up the difference, it’s time for a financial shakedown. Ask yourself what you’re spending and why. As you probably discovered when comparing your Monthly Amount and Actual Amount columns, most people underestimate what they spend on items such as groceries, a night’s entertainment, lunch at the food court during the week or clothes for the family. Can you save costs by shopping at a cheaper grocery store? Or maybe you can brown bag your lunch?
If you want to take this spending plan one step further, look at some of the nonessential purchases you make each month and log them into the How the Little Things Add Up worksheet. A happy-hour glass of wine each Friday after work might only cost you $9 with tip each week, but over a full year, you’re paying $468. Maybe that’s okay because that glass of wine is worth more than the drink itself. But you need to look at what its monetary value is, too. Added up, that $9 could pay for a weekend getaway to wine country.
That’s why tracking and evaluating expenditures is important. When people think about how much they spend as they’re spending it, they naturally start to shift away from buying things they want and toward buying things they need (or really, really want).
4. Keep on tracking
The last step to becoming budget-wise is also the most important: You have to follow your plan. Take another look at the What Should I Budget For? section of our sample budget every few months. Use what you learned from the previous months to plan next month’s budget, and then compare it to what you actually end up spending. Then use that information to plan for the following month. Over time, you’ll see real results — your estimated budget and your actual budget will start to look a lot more alike.
And don’t be too hard on yourself. Budgeting isn’t about being punitive or placing blame. It’s about making informed decisions every step of the way. Besides, that daily chocolate bar might be giving you just as much pleasure as your Aunt Marla’s season tickets to the opera give her. The bottom line is, your budget has to make sense to you.