January 13, 2014

Saving for a Dream (Part 3): Making a Budget

If you missed the first two posts in this series on how to save for you dreams, you can find them here: part 1 and part 2.

Once you have decided on your dreams and savings goals, one of the most important steps that you will take to save for your dream is creating a budget. By setting (and sticking to) a budget, you will be able to make sure that you have enough left over at the end of the month to put into that savings account. There are probably hundreds of different ways to do this, but here a few of suggestions.

But before I get too far, I have included screenshots and demos from several services that I use. I want to assure you that this is not a sponsored post. I am just including information from several programs that have helped us to create and stick to our budget and savings goals!


Step 1: Figure out how much you currently spend.

Before you even start making your budget you need to know where your money currently goes. Ideally you should spend at least a month tracking every penny that you spend. The longer you do this, the better picture of your spending habits you will have. You likely have different expenses in different seasons, so you won't really have a complete picture until you watch your spending for an entire year. So you will eventually just want to make this a habit, but to get started, a month is a good place to start.

There are several ways that you could track your spending. You could do it the old fashioned way by keeping receipts or writing every purchase or expenditure in a notebook. I am a huge fan of Excel (that might be the geek in me) for keeping track of expenses. There are also many tools online that you could use. I personally use Mint.com and I love it (although I am sure that there are many more awesome options out there)!

Image from Mint.com

With Mint.com, you can connect all of your bank accounts, credit cards, loans etc. Then it tracks any expenditures that come from a debit or credit card or bank transfer. All you have to keep track of is anything you buy with cash. Mint also has nice tools to break down your spending into different categories, to track your net income over time, and even has a basic budget tracking tool.

I use a combination of tracking our spending on Excel and keeping track with Mint. Earlier in our process I took a more hands-on approach by frequently inputting every expense from our receipts into an Excel spreadsheet. Now that I have been keeping track of our spending for several years, I take a less involved approach. I feel that I have a pretty good picture of our spending habits these days, so I rely on Mint more heavily to keep an eye on our spending to make sure that we are staying on track.


Step 2: Analyze your spending

Be sure to start with step one if you want to make a successful budget, because the most important thing about a budget is to make it realistic! In order to do this you need to know how much you currently spend before you can decide where you can realistically cut back.

A budget is essentially a plan of how much you will spend on various things throughout a month, a year, or an even longer period of time. Budgets are usually broken down into various categories such as rent or mortgage, house maintenance, utilities, car maintenance, gas money, grocery money etc.

As you start analyzing your spending you will want to create categories that make sense for your family. I tend to prefer to make fairly specific categories (i.e. car insurance, gas money, & maintenance rather than just automotive), since I feel that they help me get a better picture of our spending habits.

Once you have created your categories, sort your expenditures into these categories and calculate the total amount spent for each category. If you have been tracking your spending for a month or more, you will now have a baseline to start creating your budget.

Step 3: Create your budget

As you start to create your budget you should ask yourself a few questions:
  1. How much do I earn each month? Am I spending more each month than I earn or how much do I have left over each month?
  2. How much would I ideally like to save each month? Think back to my goal. How much do I have to save and when do I want to save it by?
  3. Are there any categories that I could cut back on?
  4. Are there any categories that might actually be underestimated (i.e. will you spend more on heating in the winter).
    Note: I use a month as a standard unit since many bills come on a monthly cycle and it tends to be a good unit of time for keeping track of a budget, but if something else will work better for you, go for it!
Once you answer these questions you can start to create your budget. Again you could do this with paper and pen, an Excel spreadsheet or one of many online or software tools. As much as I like Mint, I actually am not really a fan of their budget tool. I keep my budget on an Excel spreadsheet. I feel that it lets me play around with the numbers a bit more until I have a plan that I think will work. It also gives me more freedom to create the budget the way I like it. (Note: If you would like a more structured program to help you with the process, I have heard that many people like the free GnuCash program, but I have never used it myself).

Start by inputting you income first. Then take the categories you created when you anazyled your spending and start filling them out with how much you would like to try to spend in each category each month. Since your goal is to save money (or perhaps to get out of debt), I would start by setting your savings (or debt payment) category first. Remember, it is often better to start with a small, realistic savings goal and to increase it if you are doing well. Then go category by category and input your spending goal for each category.

As you create a spending goal for each category remember to make it realistic. Use your current spending patterns as a reference. Then if you want to cut back on certain categories, how do you plan to do that? You need to have specific plan for ways to save money if you actually want to successfully cut back. Next week I will have some suggestions for ways to cut back and save a little money (without feeling too much like a martyr). Also be sure to remember to account for expenses that might pop up later (like oil changes, new tires, higher heating bills, a summer vacation, etc) and to put them in the budget.

Finally at the end, add it all up. Do your savings + spending = your income? Yes? Then you are done! If not, play around with the numbers until they do. And one more time, remember it is better to start out with realistic savings goals, so cut back on your savings goal a little bit if you have to. I can almost guarantee that if you start saving with little baby steps, you will be able to cut back a little bit more every month and before you know it you will be saving quite a bit!


Step 4: Sticking to the budget

Now you have a plan for how you will have enough to save a bit each month. Now how do you stick to the plan? First of all, I suggest that everyone have their savings goal automatically deducted from their paycheck or bank account  and put into a separate savings account. I highly recommend using online savings accounts such as Ally or Capitol One 360. These bank accounts have higher interest rates than most brick-and-mortar banks. They also make it a little bit harder (but not impossible) to dip into your savings, since it usually takes at least a day or two to transfer the money into a checking account. Not having instant access to the money might help you to leave it alone. (And you have that emergency fund for emergencies right?)

Then your next step somewhat depends on your personality and spending style. For me, I am content to just know how much I have to spend, and then to periodically keep an eye on my spending through Mint to make sure that we are on track. Since I created a realistic budget in line with my spending habits, this is usually enough. However, if you are just getting used to spending less, or if you are somewhat of an impulsive spender you might need to use some other tricks to help make sure that you don't overspend. Here are a few ideas:
  1. It might be as simple as tracking your spending every day for awhile. This is a bit time consuming, but if you input your spending into a spreadsheet (or other program) every day, you would have a very real idea of how much you have left to spend. So at then end of the month you will know whether you can afford to go out to eat, or if you better eat at home. As you get used to your budget you should be able to relax a bit.
  2. If you need something more, you may need to use something like a cash envelope system. The idea behind this system is that for each category you put in your designated amount of cash. Then when the money in that category is spent, it is gone. There is none left to spend, so you won't overspend.

    You could literally do this with cash in envelopes for each category that you set up each month. Then when the cash is gone, you are done spending. (This method can be really beneficial if you are an impulsive spender since there many studies showing that paying with cash makes us consider our purchases more carefully since you have to make sure that you don't overspend the amount of cash you have on hand. It is also apparently more psychologically painful to hand over physical cash than it is to hand over a credit card.).

    However, in today's digital age, this method always sounded like a real pain to me. And it seems like some people agree with me. There are several online programs that allow you to use the same system digitally. There is a good overview of one program, Mvelopes.com, over at Simple, Abundant, Life. 


Step 5: Keep tracking and reanalyzing

For the first few months (or maybe even a year or more), you should continue to track every penny you spend and to analyze where your money is going. You will probably find that you are consistently running out of money in some categories and that you have left over money in others. You should adjust your budget until you have found one that seems to work for you.

And if you are really serious about saving, you will continue to find little ways to keep cutting back and adding more to that savings account! Be sure to check back next week for some tips for ways to save money.


How we are doing it:

Sometimes it helps to get an idea of what other people's budgets looks like. Remember everyone lives in different circumstances (not to mention cities with varying costs of living) and priorities (for example high quality food is really important to us). We have been actively trying to cut back for awhile (although we are still working on finding additional ways to save), so please don't try to base yours budget off of ours. 

Our current average monthly budget

Take-Home Income4,250
Auto Repair*-125
Car Insurance*-75
Renters Insurance*-15
Clothing, Housewares, ect-65
Health (doctors/meds...)-75
Land Fund Savings-2000
Homestead Infrastructure Fund-50

* Many of these categories roll over month-to-month. For example we pay insurance about every six months, and car repair tends to come in big chunks a few times a year. And our entertainment budget includes money for summer vacations. So for these categories, we actually budget more on an annual than a monthly basis.
**We usually try to estimate our income tax refund a couple times during the year. With Nathan switching jobs this year (and weird withholding problems), it looks like we might actually be paying the government a bit this year... so we have it in the budget so that we don't have to dip into our emergency fund in April.
***We also have additional money automatically deducted from our paychecks for our work retirement plans. This is just the money that we individually contributed to our IRAs.

Good luck and have fun making your own budget!

(This post was shared on the Homestead Barn Hop, Natural Living Monday, Backyard Farming Connection, Tuesday Greens, Tuesdays with a Twist, Maple Hill Hop, Down Home Hop, HomeAcre HopSimple Lives Thursday, From the Farm Hop, 104 Homestead Hop, Simple Saturdays, Simply Natural Saturdays, Clever Chicks Hop, and Homemade Mondays.)


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