Building a Budget in Five Easy Steps

Posted on March 13, 2012 1 Comment

How to Build a Budget

A colleague recently said, “I signed up for Mint.com to learn how to budget. I linked up all my other accounts. Now what?”

Good question.

Signing up for a free secure personal finance site like Mint.com or Personal Capital is a great first step to build a budget. Once your accounts are synched though, there are a few more steps you need to take in order to build your budget.

1. Give it a month. The first step in building a budget is tracking, so for about a month, you’ll need to spend like you normally do. Some sites might provide a back log that tells you what you spent the previous months, but I’ve found that the sites don’t automatically put everything in the right categories, like fitness, home, auto, or gifts. You have to go in and update the information every once in a while, which is difficult to do when you haven’t been paying attention the last month. 
2. Log in once per week to make sure your expenses are all categorized properly. This is infinitely easier if you put the majority of your purchases on a debit or charge card, or on a credit card that you pay in full every month. Otherwise you end up with a big chunk of your finances to “ATM,” which is not helpful when you’re trying to figure out where your money goes.
3. At the end of one month, view your charts. Both Mint and Personal Capital make it easy to review your spending by category. It’s pretty obvious once you see a pie chart to tell where your spending priorities are.
4. Set your budget. Separate out consistent monthly expenses that you must pay – rent, cable/internet, phone, car, groceries, loans, gas or train fare, electric, etc. – from those that are “nice to haves” – clothes, shoes, alcohol and bars, entertainment. The consistent “must haves” are the backbone of your budget. From there, figure out how much you can put towards savings and retirement. What you have leftover is yours to spend on whatever you want. It’s helpful to me to identify spending limits for each month so I don’t go overboard on these. For instance, every time I go over on restaurants or clothes, Mint sends me an email saying I’m over budget in that category for the month.
5. Follow your budget! Don’t get discouraged. If you find your categories aren’t realistic, re-evaluate your spending patterns and see where you can save. And reward yourself (a little!) when do you follow your budget. Perhaps a new bottle of nail polish for a home manicure, or a new bottle of Trader Joe’s wine and some cheese. Whatever floats your boat. You’ve earned it.

Category: Money
   Tags: budgeting

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