A budget is a handy tool to track your spending and ensure you do not overspend on unnecessary items. It is also great to use to determine what your future spending might look like.
To make a family budget, you have to know where you are spending your money.
There are some of the obvious categories that go into a budget like gas, food, and rent/mortgage. But to make a budget that will work and you can stick to, you have to know where you are spending every dollar. This is especially true for that $5* latte you buy with cash every morning on the way to work – you know, so your significant other can’t see that you bought it.
* Is $5 the typical price for a latte? I honestly have no idea.
Determining where you spend your money
To see where your money goes every month, open up all of your money accounts (credit card statements, checking accounts, etc.) and take a look.
Does your spending tend to fall into normal categories like food and gas, or do you also need outlier categories like massages and equestrian club fees? For now, don’t analyze where you have spent your money, just make a note (either on paper on in an excel spreadsheet) of everywhere you have paid someone for something. It is good to go back for the past year since some fees are yearly (like taxes and potentially car insurance), but make sure you record everything for at least the past 3 months.
Doing this will probably give you a list of places that you spend most of your money, but probably won’t give you an idea of where you spend cash. Do you keep your receipts or know where your paper money goes? If not, how is the time to start paying attention.
Don’t forget to make a note of all income you receive, also. You have to have money to spend money.
Scroll to the bottom of this post to get the free budget worksheet to track where your money is going.
Why we don’t use cash
Using cash makes money disappear without a clear tracking method for where it went. If you have the discipline to write it down every time you spend any money, then go ahead. But I always forget to track it or lose the receipt.
Instead, we put everything we buy on a credit card and pay it off every month. This way, we can earn cash back on our purchases, and we can track where all of our money is going.
If you cannot or will not pay your credit card off in full every month, credit cards are not for you, and you should use cash or your debit card and keep the receipts.
Setting up your budget categories
Now that you have a general idea of where your money goes, you have to set up your categories into which your spending will fall. Most will fall under the categories below. Make sure you break it out as much as is reasonable. The more specific you are, the better chance you will have at finding waste.
- Income (paychecks, gifts, other)
- Rent/mortgage (including taxes and insurance, unless that is covered in escrow)
- Food (groceries, restaurants, fast food)
- School Loans
- Vehicles (car payment, gas, insurance, maintenance)
- Utilities (gas, water, electricity, trash, internet, television, cell phone)
- Medical (insurance, appointments, medicine)
- Kids (daycare, diapers/wipes, clothes, toys, activities)
- Personal (toiletries, clothes, hair cuts)
- Entertainment (Netflix, Amazon Prime, video games, movies)
You may find some other spending that needs its own category, so make one for it (like massages under personal). Do not, if you can at all help it, have a category labeled ‘other’. This will inevitably become a catch-all category and you will quickly lose track of that spending. Therefore, you will be unable to frugalize it.
Beside each of the expenses you identified above, identify a category into which it belongs.
Determining your budget maximum
After you have your categories set up and marked beside your expenses, total up how much you have historically spent in each category. Remember, you want to go back at least 3 months so you can get a good idea of how much you typically spend without defining your budget on a low or cheap month.
This budget maximum will be your worst case scenario. This is the max amount you have spent per category, and ideally, you would want to make sure you spend less than that.
Take a look at your budget total – how much money you will spend a month if you spend your maximum for every category. Do you have enough income to cover it with more to spare for saving? If not, go back and analyze where you are spending your money and find ways to cut out the waste.
Making your goal budget
Now that you know the maximum amount you spend per category, you need to set reasonable goals for your spending. If you normally spend $600 on food per month, how about setting a goal of $550 and pushing yourself to find ways to be more efficient with your spending. Can you cut out those parking fees you pay just so you don’t have to walk 2 blocks? Be reasonable. Don’t say you are going to use coupons for everything if you actually hate coupons.
Be sure to check your level of spending against your level of income. You cannot spend more money than you make. And Ideally, you will be saving a large portion of your income, not spending every leftover penny. Have you heard of the phrase ‘living paycheck to paycheck’? We definitely want to be as far from that as possible.
Do not set unattainable goals during this step. If your budget is out of reach, you will get discouraged and fail to meet your goals. You don’t have to become maximally frugal overnight. Taking small steps is still great. You can always save more and make more adjustments to your budget next month!
Everyone makes a different amount of money. And everyone spends their money in different places. My goal budget will not look like yours. You will have to set up your budget specific to your situation. The important part is that you stick to your budget and save/invest everything else. But that does not give you the freedom to put wasteful categories in your budget so that you can easily stick to your budget and have nothing left to save.
Tracking your spending
Now that you have all of your spending categories and budget set up, you need to continually track your spending.
You can do that several ways.
- You can write it on paper in a notebook to track it. This is how I originally tracked my spending.
- You can use an Excel Spreadsheet like the one you can get for free at the bottom of this post. After paper tracking, I moved to this method.
- You can get a free account at Mint and input all of your money accounts and spending categories and it will track everything for you. Mint will also let you look at trends and all of your transactions by category, plus much more. You can even get pie charts and graphs of your spending. This is the method we use now.
As with anything in life, you will have to tweak and make adjustments to your budget as situations in your life change and as you become more frugal. The budget will not be a static dollar value, but a fluid number – one that, hopefully, gets smaller over time as you become more frugal.
Make sure you step back every so often and check where your money is going. A budget is not a ‘set it and forget it’ type of thing.
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Have you set up your family budget yet? What is a spending category you want to work on?