Creating a Budget

This is the third post in my series, A Family Guide to Living on Less. If you missed the first post, “How Deep is the Hole You’re In?”, go read it! Be sure to read, “Luxuries and Necessities” as well. Each post builds on the previous one, so it’s best if you’ve read the ones leading up to this.

photo credit: Art Voice

Having reviewed all your accounts to assemble to categorized lists of expenditures, it should be a straightforward exercise to construct a “typical” month’s expenses. This is where you lists the “necessary to pay” bills regardless of whether they are a necessity or luxury.

Use the same categories and subcategories that were listed in “How Deep is the Hole You’re In?“. Where there is a preset, constant cost, include it (like the rent or mortgage, which doesn’t change). For the utilities, you can average your costs and calculate the typical bill. For the items that are highly variable, an average cost is a good starting point for the figure to put on a budget. If you have purchased anything on credit and haven’t yet paid it off, create a special category called “Necessary to Pay” bills and place the payment there. This category will include auto loans, loans from retail stores, and credit card payments. Note that this is a different category in your budget from items such as, Transportation, House-Major Purchases, or Entertainment. These are debts left over from past purchases, not purchases you will be making now.

Concentrate on the necessities and “necessary to pay” bills. Now would be a good time to put a special notation (like a star) next to items that normally are monthly bills but are complete luxuries. If you can continue to pay these, then fine, they can stay on the budget plan. If you can’t, then you’d better get used to the idea that they are going to be cut from your life, at least temporarily.

photo credit: Jeff Keen

We all have expenditures that happen only once or a few times during the year. Property taxes and different types of insurance payments are typical bills of this sort. if your mortgage includes an escrow account to cover some of these expenses, then they won’t be as much of a concern as it will be for those who don’t have these accounts. The IRS can be a problem, however, if someone in your family is self-employed and you have investment income and file quarterly payments.

As you construct your typical monthly budget, include these “occasional” costs. If something is due once a year, put one-twelfth of that cost in the monthly plan; if it’s due quarterly, put one-third of the quarterly payment in the plan. In other words, average the cost over the number of months between payments.

It’s generally quite helpful to construct a time line of the year, January through December. For each month, write down the normal amount of bills you need to pay, but mark clearly where the “occasional” bills crop up. Note what big payments are pending in the next couple of months. You need a plan that can deal with them.

photo credit: decor8

Up to this point, you’ve been dealing primarily with expenses that are similar to your past ones. As you put your “typical” monthly budget together, you may run across expenses you had in the past, but don’t have now. Note these. There may also be expenses now that you didn’t have before. Note these as well.

Your “typical” budget needs to start its transformation into your “target” budget. Begin this by adjusting the costs and categories to represent more accurately your best guess for expenses ahead. As this series progresses, you should discover new ways to help you save money in all the categories in a normal family budget. The budget you just put together can have several columns; Past, Present, and Target for each category. Continue to update this budget document as you read, discover and implement debt reduction strategies.

Stay tuned for the next post in “A Family Guide to Living On Less“, focusing on Figuring Your Income.

Check out these other great posts!

Luxuries and Necessities

Tagged as: bills, budget, budgeting