Over the next few weeks we are going to spend time focusing on budgets.  It’s a word you have hated since you were 5 and your parents informed you that didn’t have enough money to buy a toy, now 30 years later it still makes your blood pressure rise.  No matter what your feelings about a budget are, it’s very needed.

I shared before Christmas that my mother was laid off, one week before Christmas was her last day.  She has never been great at managing her money, but now by force she is having to learn.  As I sat down with her that first night we looked over everything she was spending and weighed each item and it’s importance to her.  This is the first step we all need to take.  You can find a fun tip on Pinterest to start making your own soap, or knock $5 off a bill, but that’s not touching the problem.  If you don’t have the money, there aren’t enough quick Pinterest tips to make it to the end of the month.

To start fixing a money crisis we have to make a budget.  This is going to show you a few things, the first being exactly how big the crisis is.

Analyze Spending 

Look at your expenses from last month and assign them to one of the categories below.  Also ponder any payments that you make yearly so that they aren’t missed (car taxes, insurance payments). Here’s a free download from Dave Ramsey that might help.

To help you analyze spending every month try out a free program like Mint.com.  You hook it straight up to your bank account and it will categorize everything you spend.  It also has a budgeting tool built into it and they even have an app to alert you when you are close to exceeding your budget in certain areas.

Basic categories to use:

Housing (Mortgage/Rent, taxes, insurance):
Grocery purchases:
Household purchases:
Medical:
Transportation (car, gas, insurance, tax):
Utilities:
Electric & Water:
       Phone & Internet:
       Cable & Entertainment:
Clothing:
Savings:
Charity:
Debt Payments not mentioned above:
Miscellaneous:

Total Spent:

If you run upon something that doesn’t fit into one of these categories, that should be your first red flag that it’s not a necessity.  

Now that you have a picture of everything going out, compare your total out to exactly how much you have coming in.  If you are like 85% of Americans those numbers aren’t going to match up.  This is where the hard part comes in… you need to take a good hard look at where all this money went and make some decisions on what to change.  I will tell one huge category above that doesn’t feed, clothe or house you is cable.  Start there.  Just making one change and canceling one thing is enough to get you itching to cancel more.  Other things to drop are newspaper and magazine subscriptions as they come due.

There are also some big decisions to tackle.  As I sat down with my mother her biggest thing was her car.  She just didn’t have the money to make a large monthly car payment.  So she took the advice like a champ and is selling her car.  She will drive an older used car that we have for a while until she can find a new job and save up money to pay cash for a reliable used car.  For some of you this is advice that you need to take to heart, for others it may be even bigger, like it’s time to downsize where you are living to something you can afford.

If you are curious how much is a reasonable amount to spend in each category, here are some percentages of total income recommended by top budgeting gurus.  If you are way above percentage wise, that is a great place to consider how you can lower expenses.

Charity: 10%
Housing: 30%
Utilities: 5-10%
Food & Household: 10%
Clothing: 2-7%
Transportation: 10%
Medical: 5-10%
Miscellaneous: 1-2%

That hopefully will leave 13-23% that can go into savings or paying off debt.

Making a Budget

With everything categorized out, you have already done most of the work.  You now see what you are spending compared to what you are earning.  The goal for your budget is to think on a month to month basis how you can make those match.  Using credit to make them match isn’t going to work here, you have to do some work and actually make them match with real money.  If they don’t match no matter what you try to give up, then you have two options you either dig deeper and give up big ticket items or you make more money.  I know it’s not that simple to do, but in reality you have known that it came down to these two options for a while.

A few things to keep in mind when making a budget:

• You have to do this with your spouse.  You need to both be on the same page and in agreement with where your money is going.
• Your first month of living on a budget is the hardest.  You will continue to make small changes to categories and amounts for the first few months.
• Make sure to leave some money in a miscellaneous category, even it’s a tiny amount.  This is like trying to diet by never eating dessert again.  You won’t make it with some room for things you forgot about.

I would love for all of you to chime in on how you made your first budget or tips that you have for anyone that far exceeding income.  Hearing others stories is many times the motivation we need, so please share!

Each day this week we are going to tackle a category above and some big and small changes you can make to decrease expenses.