Making A Budget

I'm sorry for not posting for 2 days but it was a little crazy Sunday and Monday getting ready to come home from my girlfriends parents house. In light of not posting for Money Monday and seeing as today is Teach Me Tuesday I thought I would combine the two today and talk about creating a budget.

It's very important to create a budget once you have graduated. With all of the new financial responsibilities you take over when you graduate, knowing how much you are spending and what you are spending it on can help you grow financially and allow you to enjoy everything you want while still being responsible. I think its best to break this down into a series of steps. Like I've said before, I'm not financial expert. This guide is just what I know from my readings and my personal experience.

Step 1: Changing your thinking about a budget!
When you say the word budget most people cringe. The thought of tedious spreadsheets and math stops many people before they start. But a budget does not have to be a mental exercise requiring an advanced mathematics degree. There are plenty of software tools out there to help you stream line the process, but more on that in a bit.



Your budget can also be a motivator. Seeing your savings increase towards a goal or watching your expenses fall because of smarter spending helps you keep up with the budget. Keeping your self financially sound also allows you to enjoy the things you love to do. You will find you have more money for the things you want to do because you are cutting your expenses on the things you don't need.

Step 2: Finding the right budget tool!
I believe the most important step in creating a budget is finding the correct tool to do your budget in. You need a canvas to put your budget on. It can be as simple as a sheet of paper. For many people an Excel Spreadsheet is their first choice. I work with spreadsheets all day at my job so coming home and looking at more spreadsheets is the last thing I want to do. There are also a number of software's out there for creating budgets: Quicken, Popmoney, and Mint.com for example.

I prefer Mint.com because it keeps track of all of my transactions, bank accounts, individual budgets, and savings goals. Whatever tool you decided to you use it must be able to keep track of your spending/expenses, savings goals, account balances, and transactions.

Step 3: Tracking your initial transactions!
Before you can create a budget you need to know where your money is going. For a month you need to keep track of all of your transactions. You can keep your receipts, or write it in your check book, or use your banks online transaction history. Or if you are using a software like Mint that is linked to your bank accounts, it will keep track of your transactions for you. I chose 1 month because just starting out after graduation all of your income and expenses will occur within the same month.


Step 4: Categorizing your transactions!
Now that you know all of your transactions within a month you need to categorize them. First you need to define each transaction as either income, expense, or spending. Income is any money that comes into your bank accounts. Income could be a paycheck, money from gifts, advertising income from a blog, interest earned, etc. You can further break income down into primary income and secondary income. Primary income would be a paycheck from a job, Secondary could be money you received as a gift or a hobby you have that makes money. From time to time you may also hear about passive income. That is income that you do not actively have to work for such as interest earned from savings or advertising income.

Expenses are different than spending. You can think of expenses as debts or bills you have to pay. These are things you must pay each month such as rent, utilities, or loan payments. You can think of spending as the money that comes out of your account that does not go towards an expense you have to pay. Money you spend on restaurants, movies, and shopping on non-essentials should all be put in the spending category.

Step 5: Adding savings to your equation!
An important aspect to any budget and financial portfolio is money you save. Now, there is no defined formula for how much is the right amount to save nor is there a perfect place to put all of  your savings. Where to and how much to save is a topic for another post but in general experts believe you should save 15-20% of your income.


Step 6: Deciding how much money to allot for each category!
Now again there are money formulas for many experts on how much to allot for each category. For me personally I prefer using the 50-30-20 method. This method says you should spend 50% of your income on expenses, 30% of your income on spending, and 20% of income should go to savings. I prefer this method because it allows me to allot my own amount for each category while still staying within the method. I also prefer this method because it does allow you to spend more than allotted in one category as long as you spend less in another category. For example you could spend a little more on movies one month but make up for it by spending less on cloths. That is as long as your spending does not exceed the 30% of your income.




Step 7: Keeping you budget!
Now that you have your budget its time to start using it. It doesn't help to have a budget if you are not checking it on a constant basis. For me I like to keep a pretty close tab on my money and where it is going so I check my budget at least once a week sometimes more. But you can check your budget when its best for you as long as you are doing it consistently. I would also suggest that at the end of each month you look at your budget and re-evaluate it. Figure out where you are over spending and find ways to cut back. Make sure you are keeping track with your savings goals and make sure that you are paying your expenses on time.

Hope this helps put you on the right track to being more financially sound.