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Budget 101: How to Start a Budget is Part 1 of my Budget 101 series.
As I mentioned in a post a while ago, I recently became a stay at home mom. If you read that post, you may have picked up on the fact that this affects our budget in a big way. Truthfully, we hadn’t been living on any kind of budget the last 2 years (since I went back to work after my son was born). Before that, we had been budgeting consistently and had even managed to pay off $40,000 of debt! Now we need to get back to basics and start a budget again.
Steps to Start a Budget:
Define Your Budget Goals
Do you want to get out of debt? Save for the future? Just make sure you can cover your bills? Wherever you are with your finances, you need to start a budget. If you have plenty of money for your bills but want a good nest egg for retirement, you still need to budget. We wasted so much money the last 2 years simply because we were not tracking where our money was going. Start a budget with that goal at the forefront of your mind. Now, our goal includes making sure we can cover our bills with one income while still paying off our remaining debts.
Write Down Your Budget Categories
So you have your goal in mind, now what? Figure out what categories your family budget needs to start a budget. Do you have fees for school, dance, sports? How about a gym membership, Amazon Prime, or Netflix? Write it ALL down. Our current budget looks something like this:
When doing categories, don’t forget things that are “once in a while” expenses. For example, my daughter takes dance. We pay monthly for dance September-April. But May-August, I keep dance in our budget so I can have a cushion to cover costumes, rehearsal gear, dance shoes, recital tickets, etc. We also use something called sinking funds.
What are Sinking Funds?
Sinking funds basically are budget categories that allow you to plan ahead for a known expense. You know Christmas comes up every year, so instead of trying to find an extra $500 in December, budget $42 for that every month. We have gifts as a separate category to cover birthdays, weddings, anniversaries, other holidays. Car and home repairs we decide a set amount each month to put aside as an “in case” fund. For example, the car repair category can be used to replace brakes or tires or to cover an oil change. Our home repair category has been used in the past to cover a new water heater and new fridge when ours went out unexpectedly. This allowed us to purchase those items when we needed them without using those credit cards we had paid off!
How Much Should I Budget?
Ok, you have your categories and your goals but you still don’t understand how to start a budget. I suggest printing out your last 3-6 months of bank statements and figuring out where your money has been going. Why? Because if you are making a budget and think $200 for a month of groceries sounds great, but in reality your family has been spending $1000 on average, you are going to have problems. You have to know exactly where your money has been going before you can decide what your new category goal should be.
We love a lot of Dave Ramsey’s budget advice and have applied it to our budget in the past. BUT I know he would look at our categories and slash the dining out and cable and probably a few others. We are working toward that, but remember we have spent the last 2 years not following a budget. Getting back into the habit of cooking at home 100% of the time is going to take some easing into. Some people may be able to go from 1 to 100 with no problem, but for us, that approach doesn’t work. When you start a budget, you may want to keep in mind Dave Ramsey’s recommended budget percentages. They can be a great guideline if you are struggling with what is a reasonable category amount.
Not Enough Income?
When you start a budget, you may feel your income isn’t enough to cover your monthly bills. This is when you have to look for areas you can cut. There are certain things that are necessary for your family: food, shelter (including utilities), transportation, and basic clothing. Everything else is fair game to cut or reduce. For our family the first things to go were the “extras” like Sirius & Hulu subscriptions. Then we cut back on dining out, cigars, grooming (hair cuts, nails, etc) and our gift sinking funds. Next up is the gym membership (that is never used), cable, and home phone.
If you cut back on the “extras” and are still struggling you can look into more extreme measures. Sell anything you don’t need, trade in cars with too-high payments (preferably for one paid for in cash), move to a cheaper location, frequent discount grocers and shop thrift stores. Do whatever you can to get your budget in line and keep your family’s needs (not wants) covered.
If you do all of this and still can’t cover your family needs, then get creative and find ways to increase your family income or further reduce your monthly spending. You can also look into programs designed to help low income families with food, utilities, housing or daycare.
Congratulations! You have just made a budget!
So there you have it, you have just done the basic steps to start a budget for your family. I strongly suggest completing these steps with your partner if you have one. It will be very important that you both have a say in how the finances are managed. That being said, I know some people don’t like to be the “numbers” person. What we do is I do all the calculations and make our budget plan and then we talk about it. We both set our goal and are working as a team to make this happen.