One Million and Beyond

How I Budget

By Matt - Thursday, October 30th, 2008

When I first started this site I knew very little about budgeting or how to create a budget. Realistically I knew it was something I should be doing, but wasn’t. I also knew that I was spending more money than I was bringing in because I was struggling to pay my bills every pay check but I didn’t know where my money was really going. Since then I have managed to bring budgeting into my life and get some control of my finances. Recently a reader asked me how I budget and I thought considering the state of the global economy it might worth sharing my approach.

This is my approach to budgeting (please note I am not a professional, just an everyday person). I know that software exists out there to help people balance their books and budget but I chose Excel and as my tracking tool. Here is how I budget:

1. Collect data
   When I first started budgeting this is all I did. I collected my receipts and my bank statements. I tracked where every penny I spent was going. This part is probably the most important since it gives the later sections a realistic starting point.
2. Create a rough budget
   I use the data I’ve collected over the past few months and I figure out how much I have spent on a particular category and how much I’m likely to spend again. For example a common expense is food (say I normally spend $100) then I look at items that might go change for the coming budget (if I’m having a dinner party I’m likely to spend more money). Once I have these together I have a rough idea what my budget looks like based on my historical spending (with some future planning).
3. Adjust to fit
   At this point I’ll have a pretty good idea if my budget has me living beyond my means or not. It’s also the point where I try to adjust my numbers to be more in line with what I would like to spend. For example when I realized I was spending hundreds of dollars a month on eating out I cut it down and eventually stopped spending money in it altogether. After this my budget for the week is complete
4. Continue collecting receipts and keep spending down to match adjusted budget

Now the most important part of the budgeting process: keep collecting data

5. Repeat from step 1 every budget

Over time this has given me a pretty good sense of how much money I spend from week to week and how regular changes will impact me. For example I know that on average I spend about $100 on food every week (or I did before the baby) and I use this as a starting point for my budgeting. Each week varies slightly but I have a good idea where my money is going and if I’m living beyond my means. It also gives me regular feedback based on previous spending rather than a guess. I use the feedback from the data to make changes and assess why my spending might be off.

Hope this helps, if anyone has some comments or tips they’ve used in the past I would love to hear them.

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