This is a guest post from Little House in the Valley
who blogs about tips for smaller living. Many of her topics include little
house plans, becoming financially savvy, and learning to do more with less. Little House and I are involved in a larger
personal finance blogger’s network called the Yakezie.com, a community of
finance bloggers selflessly supporting others with the common goal of sharing
our finance experience and knowledge. As part of that support, we frequently
swap posts to help broaden our readership.
The Basics of
Budgeting
Why budget? Many people live day-to-day without any sort of
financial guidance. People have inaccurate balances of how much money they actually
make (bring home) and many are unclear on how much they spend and on what. Yet,
when two people meet, fall in love and become a couple, it's a good excuse to
get serious about your finances. Income, expenses, banking and credit all come
into play here.
The expression, "Two heads are better than one,"
definitely applies in the case of budgeting. Instead of working in isolation, a
couple working together towards the same financial goals can achieve much more.
However, before you can set any financial goals, you need to know how much
money you have to work with and how much in expenses or debt you need to pay
off. Budgeting is the first step in becoming financially responsible and independent.
The word "budget" sounds about as interesting as
doing chores around the house. Nevertheless, budgeting is really quite simple;
a budget reflects the money coming in and going out. You track your income and
expenses for a period of time, then set realistic goals based on the
information you've collected. As you track your money, use this as a starting
point to discuss areas where you might be spending too much and common financial
goals you'd like to work on.
Getting Started
Now comes the dirty work; it's time to track income and
expenses. Tracking income is the easier of the two, but make sure you've
accounted for all income streams including any supplemental income, credits or extra
cash. You'll also be pleasantly surprised that by combining both of your
incomes, you have more money to work with before and after expenses.
The harder part is the latter: Tracking Expenses. If you're combining households, some costs have
gone down for one of you (or possibly both). Take this time to also discuss
each other's bills, especially debts like credit cards, student loans and any
other debt either of you have.
Now for the nitty-gritty: Calculating Expenses. There are a couple of ways to do this; one is
manual, the other more automatic. The manual approach means collecting receipts
or tracking every single expense, then entering it into an Excel spreadsheet or
writing it by hand in a log of some kind. It can even be a simple legal pad
which is definitely more tedious, but still effective.
The automatic approach will still mean entering in all
receipts, but doing so in a program like Quicken or Budget Pulse which will
tally everything up for you as long as you've categorized your entries
(groceries, eating out, insurance, etc.). Both programs, one is software the
other a website, will create graphs and charts giving you a visual of where you
spend your money. There are also free, online tools you can use to manage your
finances. Quicken has a product called Mint that can do a variety of things
along with educate you both further about your money.
This is also a perfect time to discuss who will do the work.
At this stage it is highly recommended that you both play an active part in the
actual tracking and monitoring of your money. Married couples who manage their
money together are typically more financially successful.
Now What?
So you know how much you make and how much you spend. The
next step is actually setting
your budget based on the figures you've gathered. Maybe you've found you are
eating out too much and the two of you have decided to cook at home more often.
In the "restaurant/dining out" category, you'd set your budget for a
little less than what you've been spending. However, in the
"groceries" category, you'd round up a bit to balance out eating at
home more often. Below is an example of a budget including categories:
For recurring expenses that don't fluctuate, set the amount
to the realistic figures. It's always a good rule of thumb to set your budget
to reflect your actual expenses and for the sake of sanity, round up not down
on the more variable ones. If your cell phone bill is always $68.90 a month
then put $69.00 down in the budget. The first month or two, you'll want to
follow your expenses and compare it to your budget; tweak the budget as needed.
Hey, this sounds like
a lot of work!
For many people with reliable incomes and stable expenses,
much of the work load is in the beginning in the form of tracking money coming
in and going out. Once you get into the groove and hopefully continue tracking
expenses, the budget can be reviewed only a couple times a year.
The Benefits
The greatest benefit is that you and your partner will have
a good understanding of your income and expenses. Together as a team you can set future
financial goals and create a plan to achieve those goals. Those goals might include
paying off debt, saving for a house, or building an emergency or slush fund. Now
you have a starting point.
I know people differ on this, but for us, we couldn't have achieved nearly the financial success we have if not for our commitment to budgeting and tracking expenses. A budget is or blueprint for success, and tracking expenses (and income!) tells us whether we're following the plans!
ReplyDeleteNice post! I agree that couples need to team up with each other to really succeed. I know many couples who prefer to keep their finances completely separate. You combine a saver with a spender and together the couple's finances go nowhere.
ReplyDelete