Estimated Time: 1-2 hours
Materials: Results from Tracking Your Spending
Project Difficulty: It depends

Imagine your financial life like a road trip. Your balance sheet is like taking inventory of everything you currently have along with you. Tracking your spending is like taking note of the landmarks that you pass along the way. Your budget is your road map, and without it, you might end up in the ditch or over a cliff. Its okay if you take the long way a few times or get a little off track, but without using a budget, how are you even going to know that’s the case?

Start with the results of tracking your spending. If you skipped this step, I highly recommend going back and doing it first. For one thing, it’s going to organize your budget into the actual categories that you use to classify your expenses. Second, although you could try to estimate all of your expenses, using the actual amounts will work much better. It’s amazing how that cell phone plan that you think is only $50 per month turns into $74.76 after taxes and other charges.

I think the best format is to have all your categories in a list format (along the y-axis, so to speak) either in a spreadsheet on your computer or written out. Next to them you will have a monthly budget column (to the right on the x-axis) and a yearly column. You should have an idea which amounts are recurring stable expenses (like your internet bill), recurring but unpredictable expenses (like your electricity bill) and which are one-time or infrequent purchases (like a couch). The recurring stable expenses are the easiest, just put the monthly amount in your monthly budget and multiply by twelve for the yearly column. For the recurring unpredictable expenses take an average of your last three months, or use those three as a starting point in estimating an average monthly amount. For instance, if you are looking at the heating bill for November through January, the summer is probably going to be lower. You want an average amount over the course of the year and you want it as accurate and reasonable as possible. For infrequent purchases, think about what you have bought in the past year and what you intend to buy in the next twelve months and put the total in the yearly column. Don’t forget to put your expected monthly and yearly income in there somewhere (usually at the top).

Now, in the yearly column add up your expected income and subtract your total expenses, this is the projected “bottom line.” How does that look? A basic tenant of personal finances is to spend less than you make, in other words to save a (hopefully significant) portion of your income. This brings up a point about your budget, you should add a line for savings – this is the amount you want to save beyond the amount you need to save for large infrequent but planned purchases. That way, if you have any left over you won’t feel bad about spending it, and if you are below your goal you aren’t as tempted to lower your savings goal.

Play around with your budget, if you are spending more than you are earning it’s time to cut some expenses. In the long term you can try to make more, but in the short term the easiest thing to do is cut your costs. Figure out what spending is absolutely necessary, what spending is necessary but can be adjusted in time, and what is discretionary. Come up with something you can live with and start updating it with results each month to see how you are doing. At this point you can also add your results to a financial program if you use one. Congratulations! You have joined the minority of people that actually pay attention to their finances!