List the expenses starting with what you know for certain: rent or mortgage, utilities and food. Depending on your household, you may also have childcare expenses, car payments and insurance, health care, alimony, etc. Also be sure to include expenses that you pay quarterly, semiannually and annually. If you are in the process of paying down unsecured debt, list that payment as an expense. Next, start looking for miscellaneous expenses that are actually recurring expenses. If you place $20 in the collection plate at church each week or if you generally spend $10 a month on apps for your phone, make note of these expenses.
As your next step, I suggest taking your first pass at dividing up your expenses into mandatory and discretionary spending. Utilities are almost always a mandatory expense; however, the “expanded, triple-deluxe premium-platinum” cable TV package may shift from a mandatory utility to a discretionary item as you work your budget.
Once you have all of your expenses divided into mandatory and discretionary categories, comb through past bills to find how much you spend on each item to get a monthly average of what you actually spend — especially for quarterly, semiannually or annually expenses. By allocating an average amount to set aside, you should have no problems with your normal monthly cash flow when these payments are due. For example, car insurance that is $450 every six months would be $75 monthly ($450 divided by 6 = $75).
Ideally, you should look at your last 12 months of statements and record where your money is spent. This is where you’ll discover your foolish habits of spending $35 a week on coffees and sausage biscuits or $40 a month on celebrity gossip magazines. While you shouldn’t deny yourself all pleasures, you may realize your money could or should be spent elsewhere.
Discovering what you typically spend, allocate your funds for the next month to each expense. If you want to eat out for lunch because it is an integral part of networking with key employees at work, allocate your money accordingly. You want to set up realistic goals, so feel free to allocate $200 a month to business lunches. However, you still have to track your spending during the month. Once you spend the $200 you’ve allotted, you should avoid spending more.
Likewise, if you are spending more than you are bringing home, something has to give — preferably before you spend it. The insight from creating a budget is that you begin evaluating your spending to ensure it meets the financial priorities you have. That is why you paid yourself first. That is why paying down your consumer debt should be as much of a priority as your mortgage payment.
Remember, your long-term financial goals — your retirement savings, your child’s college fund or your family’s vacation to Italy — should be budget line items, so you should be able to allocate every dollar you earn.
William G. Lako, Jr., CFP®, is an Executive in Residence at Kennesaw State University’s Coles College of Business and a principal at Henssler Financial. Mr. Lako is a CERTIFIED FINANCIAL PLANNER™ professional.