Ten Things To Do Before You Build A Budget

Before you create your next budget or monthly spending plan -

1.  Track all of your spending for a month.

Using a spreadsheet, pen and paper, list, or some online software, track your spending for one month.  I’ve written about this before, but it is definitely worth reiterating!  Track all payments – including those made by check, debit card, cash, (and credit card, if you choose to use one).  Remember to also include any payments that are automatically withdrawn from your checking / savings accounts.  (I use an Excel spreadsheet to track my expenses and manage my monthly – and annual – budget.)

2.  Create a detailed list of irregular bills and expenses.

Remember, for a budget to really work, you need to plan for non-monthly (irregular) bills and expenses.  These are the ones that don’t happen every month – for instance, you may need to pay annual life insurance premiums, twice-yearly automobile insurance premiums, and property taxes.  These bills do not arrive in your mailbox each month, but they in your budgeting plans.  Be sure to include them, and budget for them on an on-going basis – you don’t want to have to blow your budget for one month on these sorts of expenses!  Set aside a portion each month and you will be ready when the time comes.

3.  Use a free checking account with free online bill pay.

I could not manage my finances without a free checking account and free online bill pay.  Instead of writing several checks a month, I can go online, schedule payments, and be done with paying bills in a matter of minutes.  It helps to bank with an institution that integrates with your budgeting software of choice, or one that allows you to download transactions in several different file formats.  (If you are interested, contact me at fhbguy@gmail.com and I can arrange a special bonus for you through my partnership with Wachovia!) However, don’t set things to pay automatically – you always want to be able to review a bill before you pay it in case there are any discrepancies!

4.  Open a savings account.

I use an online savings account – one that allows me to quickly transfer money via its transfer system to and from my online checking account.  (If you would prefer one account, consider an interest-bearing checking account, like the ING DIRECT Electric Orange Checking Account – if you are interested, contact me at fhbguy@gmail.com and I can arrange a special bonus for you through my partnership with them!)  You need an account where you can earn interest, while temporarily saving money for non-monthly bills / annual expenses.

5.  Consider a cash-management system that will work for you.

I am comfortable carrying cash, but some may not be.  Find a cash-management system that you like and use it in connection with your budget.   You may choose to use a debit card, or even write checks, instead of using cash, but be sure you have some sort of system set up that helps you account for how much cash you need and spend.  Learning to properly handle cash, without wasting it, is one of the first steps in the life of a maturing home-finance manager.  Stop using the excuse that you “spend more with cash”.  If you can create your monthly budget.  Determine when you will discuss the monthly or weekly budget with your spouse or other interested parties.  Be specific and write the date and time on your calendar.  Instead of paying bills “whenever you have the chance”, build some time into every week for handling personal-finance related chores.  Setting aside time specifically for this will dramatically increase your financial health – no more ‘oops it slipped my mind’ or ‘I lost the bill’ problems!

7.  Balance your checkbook and reconcile savings account when you do your budget.

It almost goes without saying, but before you can create a budget, you need to know how much money you have on hand.  Also, consider taking a look at any other accounts you might have – retirement, education savings, etc. – just to make a note of current balances.  Make sure at the end of the month that everything adds up and that you know where all of your money is!

8.  Determine your next financial step / goal / plan.

If you are trying to build an emergency fund, you need to have an emergency fund category in your budget.  If you are trying to get out of debt, you need a debt reduction category in your budget.  If you are trying to fund your Roth IRA, you need a Roth IRA category in your budget.  You get the picture.  Also, remember, after you get out of debt, you can then remove that category from your budget, and replace it with some other category.  The point is – incorporate your current goals within the budget.

9.  Prepare yourself to succeed (and fail).

If you have never lived on a budget, prepare to be amazed by how in control you will feel, once you start using one.  Also, be prepared to fail, and feel frustrated, once your “perfectly” detailed plans fall completely apart.  They always do – unexpected events are happening all the time. The truth is, none of us can tell the future, but we can make some pretty decent predictions, based on past expenses and experiences.  For some, budgeting is easy, and becomes easier.  For others, budgeting can be a struggle, and it takes time to find the groove.  Be patient and enjoy the process!

10.  Understand how to budget with irregular income.

For most people, even those with regular monthly income, it’s a good idea to learn how to budget with irregular income.  For instance, most will need to know what to do with year-end bonus or a tax rebate check.  For many, especially those who work on commission, it’s critical to learn how to budget when on an irregular income.

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