Hi friends and welcome back! As you know, we’ve recently been taking our budget under the knife and dissecting it head to toe. Why? Because we’re looking ahead, making plans, and thinking about the future when Baby Pocketchange arrives! The struggle is real – we will need to adapt to our surroundings!
WHERE DO YOU START
This is probably the first question to answer when the word “budget” or “cash flow” gets thrown around. Where do you start? If you’ve never budgeted before, this could easily be a big question in your mind. I’ve got a secret that will help you get started – and the first step in creating a budget is not what you’d expect
- Understand what a budget is and how it functions!
- List all possible budget categories
- Fill out the budget with known expenses, and make adjustments as necessary
- Put budget into action
STEPS 1 & 2
Over the next few weeks, we’ll look at each of these steps, starting today with Step 1 and 2. The first step in our process was to refocus on the purpose of a budget – a plan on how to best use our income. A budget gives you the freedom to spend money on the items you need and allows room for personal spending. Just don’t spend it all in one place!Understanding the purpose of a budget and how you can effectively use your income will give you direction with your finances that will lead to freedom. Click To Tweet
Understand this – budgets are not just about writing down your income and expenses and then becoming overwhelmed with how much you don’t have left over. You must take action! Budgets also grant yourself permission to responsibly spend while you continue to learn, grow, and improve your situation through expense reduction or cutting. Sometimes that means not spending extra money to eliminate expenses (like debts). Other times it’s okay to have spending money (small surpluses, etc.). The budget gives you the insight into what works for you at that time.
After we refocused on the purpose of our budget and discussed our Financial Independence goals, the next step (Step #2 if you’re following along) was to write down our budget categories. The goal – gather all known expenses for the budget that occurred throughout the year. From the monthly bills like utilities to everyday expenses, and even the once or twice a year expenses. Since we’ve already worked through this step in the past, we simply reviewed and updated the categories. It also helped to list/identify how often bills are paid, as seen below in several instances.
Here’s a list of the items that we’ve identified for our budget:
- Mortgage / PMI / Taxes
- Church Giving & Missionary Support
- Bills & Utilities (Water/Trash/Gas/Electricity/Internet/Phones)
- Life Insurance
- Car Insurance (annual)
- Homeowner’s Insurance (annual)
- Food (groceries and dining out)
- Medical Bills
- Tree trimming bill (temporary)
- Clothing (generally thrift store purchases)
- Household goods (toiletries, cleaning supplies, etc.)
- Saving / Investing
- Subscriptions (Amazon Prime, Netflix)
- Gifts (including Christmas, birthdays, etc.)
- Car Repairs/Maintenance/Registrations
- Home Repairs/Maintenance
- Baby Pocketchange
- Personal spending money
- Website expenses
Note: There are numerous categories to add that we didn’t come across in this annual budget review. For example, we don’t have a car payment, pet food/supplies, salon/hair care, student loan payments, and many other categories. Our list is unique to us!
I aggregated some categories to try to keep this list short for the post, but you get the idea I hope – put together a master list of all budget items with details. You should make time to review the past year’s expenses, and Mint is great for this sort of review if you’ve been using it! Then, next to each budget category item, write down what you have spent or expect to spend. Excel is a good tool for tracking these long-term, even if it’s just a simple list of names and frequencies. Creating this list will help determine how much money is flowing out the door. But, why is this important?
If we don’t have enough money coming in to cover our expenses, we potentially fall into the hole of credit card debt to stay afloat which is always a bad idea.Spending your hard-earned money is not a bad habit, but spending money you don't have is! Click To Tweet
Of course, there will always be something that comes up that isn’t on our budget list. For example, we recently added the tree trimming line item, and it’ll only be in our budget for a few months. Thankfully, we found a fairly inexpensive company who was willing to let us make payments instead of all at once. Because of unexpected expenses like this, we try to review our budget often and recommend you do the same.
This leads us to the next step that we’ll cover next week!
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