The Budgeting Process

Creating a reliable budget is one of the best things you can do for your financial life.  Having a budget that you can consistently rely on is a good way to ensure you know where all your money is going.  While the task of actually sitting down and creating a budget may be scary for some, once completed, a huge burden is often lifted off your shoulders.  In order to help you get started, I will explain the budgeting process and then, even more importantly, give some ways you can stay consistent and stick to the budget you created.

Once you decide to create a budget, the first thing you should do is make estimates on where your money is going.  It is important to remember this is merely an estimate; this is not your budget.  The reason behind making these estimates is to determine how in tune you are with your finances.  More times than not, during this step people will find that they are spending more money than they thought.  This is also a time to determine what your wants and needs are.  A need is an expense that must be paid, or it would bring consequences, such as bills, mortgage, tuition, and food (to an extent).  A want is an expense that can be cut back on or avoided, if need be. Examples of wants include fast food, entertainment, shopping, etc.  Once you are done with the estimating stage, you are ready to move onto the next stage.

The next stage is determining where your money is actually going.  This stage can be tedious, and easy to give up on because it takes time.  In order to complete this stage, you must keep track of all your purchases.  One way to complete this is by keeping your receipts from every single purchase.  This can take as much as two to three months to complete.  The longer you track your purchases, the better understanding you will have of where your money is going, and in turn, the more accurate your budget will be.

The next step is to prepare your budget.  Once you reach this step you will have a good understanding of where you are currently allocating your money. Decide what categories you would like in your budget and place the amounts you gathered while tracking your expenses in those categories. If your expenses equal more than your income, you must determine what areas you want to spend less in or possibly even eliminate.  A good way to determine what areas you want to spend less in is by revisiting the list of needs and wants you made during step one of the budgeting process. You may also reevaluate whether you can get a better deal on some of your current bills such as internet, renting a less expense apartment, finding a better deal on car insurance, etc. If you cut back enough money to have a surplus and need to find a place to allocate more money, you must ask yourself what is most important to you.  It may also be wise to create an emergency fund for when life’s unexpected struggles arise.  If you choose to create an emergency fund, you MUST specifically constitute what is an emergency before you put any amount of money into that fund; otherwise, it is easy to look at any situation later and call it an emergency.

You must then revise your budget from time to time.  After you have used your budget for a few months, look to see how effective your budget really is.  A budget is not written in stone, it can be altered as needed.

Finally, the most important step in budgeting is following the budget. It does not do any good to create a budget and never follow it. Some ways of following or tracking your budget include using tools like Mint.com, EveryDollar, Quickens, as well as having an accountability partner who you trust to make you stay true to what you promised yourself you would do.

Hopefully this helped you better understand budgeting.  If you would like to take a more in depth look at budgeting, or you simply just need someone you can trust to be your accountability partner, you can sign up for a meeting with me, Michael Jensen, at http://www.ronblueinstitute.com/nexus-financial-discipleship-center.