I realize I haven’t written in a while. The weather has been super hot and our computer room has the Chameleons cage in it with heat lamps so the thought of sitting up here 9 months pregnant was all kinds of not appealing. I have to leave soon for a Doctors appointment but figured I would write a little bit about where to start with a budget.
First off, if you haven’t figured it out already I am a huge fan of Gail Vaz Oxlade. I watch all her shows and have read most of her books. She is brilliant and interesting. So my guide to doing a budget is very much based on her rationale. I have read many other blogs and books etc. about creating a budget and i think they all have one common fatal flaw. You cannot and should not (in my opinion) even attempt to make a budget without first doing a spending analysis of at least the last 6 months. Yet most people say this is unnecessary and a waste of time. However, how the heck are you going to set up a realistic budget if you have no idea what you have been spending? One of the biggest mistakes people make with budgets is that they guestimate…well my car payment is around $300 a month so I’ll budget that. No! My car payment is $282.45 a month and that needs to be budgeted as such. In that example it helps free up some money…Rather than over budgeting for the car I need to budget the $282.45 a month, the exact cost. This now leaves 17.55 a month to be placed somewhere else ( that’s 210.60 a year…of bad budgeting). All too often though we guestimate the wrong way. Well I usually only spend $40 a month on gas and husband probably spends about a hundred so if I budget $150 a month that’s realistic. Is it? Looking at the numbers we often spend closer to $250 a month on gas. Surely we could be smarter and drive the Sonic more often and the Ram less often and save a bundle on gas but you cannot make these choices without knowing the numbers. The numbers do not lie! If you skip this step and attempt to just make a budget, you will go over budget and you will be hit with “unexpected costs” (really you have to pay for registration on your car EVERY year? How did you miss budgeting for that?!). Ultimately, by skipping this step, you will never be successful with your budget.
There’s a couple of good ways to do a spending analysis. When we initially started budgeting I did a spending analysis the good old fashioned way and it is the way I still personally recommend. Print off all of your bank statements and credit card statements for the last 6 months, get out a calculator, a highlighter and a notepad and start working (a big mug of hot chocolate with whip cream would not hurt this process either). I love the flexibility that using pen and paper offers. You can make your own categories based on what is important to you. For example, for Gail pets falls into the “other” category. However we have 2 cats, a dog, and a chameleon and we are hoping to buy a fancy mouse and get our fish tank back up and running in the next few months. Our pets are important to us. By doing my own spending analysis I can see how much we are spending on our pets and create a budget column just for them. So I would go through all of the bank and credit card statements and look for things related to pets, the humane society, Petsmart, the vet etc. and add up all of the costs over the entire 6 months then divide by 6. That is my average spending a month. It is not good enough to do this for just a month or two. Find the average over at least 6 months. This is vital because it holds you accountable for “one-time spending” that you otherwise could have missed. For example we just bought my dog deworming pills. He is a big boy and needs a double dose compared to a smaller dog. We spent $60.65 on medication for him in the month of July. If I had only looked at Augusts spending that medication would have been missed. It is dumb to miss things like this and by not looking at at least six months you are setting yourself up for failure.
Some things on this will be easy for you to map out, that is- your “fixed expenses.” These are things like the car payment, insurance, rent/mortgage, etc. it is the same amount every month so it is easy to track and easy to budget for. It is your variable expenses that can get difficult. You will want to create categories for things like groceries, vehicles (gas, oil, repairs etc.), entertainment, possibly utilities (I know mine aren’t always the same depends on the time of year right?), clothing, gifts, charitable donations, debt repayment, health and fitness, children, and personal care (hair cuts, medications etc.). Then you will want an “other” category as well to catch things that are occasional expenditures that don’t fit into the other categories. Make sure you don’t overlook your bank fees. I can also practically guarantee that you are going to find things on your bank statements and have absolutely NO idea what it is. It may be a random jumble of letters…check the amount. If it is $41.50 it could very well be $40 withdrawn from an ATM + the 1.50 charge. Keep track of the ones that you just aren’t sure about and look for trends.
Finally, while doing this process you are going to want to look at how much money you actually bring home on an average monthly basis and how much you spend. It is amazing how easy it is to spend more than you make. You put a few things on the credit card here and there and give them the minimum payment and well….you’re still spending more than your making. If you notice that your average spending is say $200 more than your average income you know when you create a budget you need to decrease your spending by AT LEAST $200 if you don’t want to continue down to debt trail.
If this sounds like way too much work for you I am tempted to say that you don’t actually care about your financial status. You don’t actually care about getting out of debt or buying a house or starting a family because if you did care you would find time. I found the time to do this while being a full time-5 classes- university student working 30-40 hours a week and while maintaining a good GPA. If I could find the time you can find the time. However, if the task itself seems way to daunting (maybe numbers freak you out), I get a sick joy out of this. Send me an e-mail at firstname.lastname@example.org and perhaps we can work something out. It is really eye-opening to do it yourself though and I highly recommend it. Feel free to comment on this post if you have questions about the process.
Another option for completing your spending analysis would be to use a site such as http://www.mint.com. To use mint you plug in all your banking information and it does all the work for you including making some sweet charts for you. Mint is a free service that makes it money through advertising. It may come up and say “You spent a lot of money on gas this month have you considered getting a cash back gas credit card?” etc. You do need to be careful with sites like mint. It is never advisable to give out your banking information and this site does require your bank account numbers and passwords to online banking. This allows it to constantly update its data. It is a really cool site however, if you are ever the victim of identity theft and your money all disappears the bank may just laugh at you if they find out you were using this site because you signed a contract saying you would never give your information and passwords to anyone including your spouse.
So to sum up:
Creating a budget: Step 1 is to do a spending analysis of the last 6 months. You can achieve this by
1) Print out all of your credit card and bank statements for the last six months.
2) Add up all of your fixed expenses over the 6 months and divide by 6 to get an average
3) Create categories for your variable expenses that are meaningful to you
4) Add up all of your variable expenses over the 6 months and divide by 6 to get your average monthly spending
5) Add up all of your sources of income over the 6 months and divide by 6 to get your average monthly take-home income
6) Add up all your expenses (fixed and variable) and divide by 6 to get your average monthly spending total
7) Subtract your spending from your income to determine if you are actually living within your means.
While you are doing this process, take a moment to add up all your debt as well. Student loans, car loans, lines of credit, etc. So that you can see how much money you owe. The average Canadian has over $20,000 of debt so don’t be ashamed if you have a lot. Be ashamed if you just keep sitting on it paying minimum payments and hoping it will go away.