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How to Create a Better Budget – Part 3

in Budgeting

This is the third part in a series on Creating a Better Budget

The first installment of the Better Budget series set a foundation of clearly defined financial goals.  In part 2 of the Better Budget series we established the categories we need to track.  Now we are going to get to work on the amounts to budget for each category.

Better Budget Step #3 – Establish Budget Amounts

Most budgeting advice I have heard starts with you tracking every penny you spend for a month or two.  After doing so, you sit down and total up the amounts and use that as your starting point.  This is a perfectly viable way to get started, but instead I choose to jump right in and start with a budget day one.  We will refine the amounts in the future.   So grab some paper and lets get started.

In order to come up with our initial budget amounts, we need to gather whatever information may help you make the best guess possible for each category, such as:

  • Bills and invoices
  • Credit card and bank statements (or online transaction history)
  • Check book register
  • Receipts
  • Prior budgets

For many categories, this information is going to get you most of the way there – for example your housing category is probably very straight forward and consistent from month to month.  Other categories are going to take a little more work.  Typically Food, Clothing, Entertainment, and possibly Utilities and Transportation are the tougher ones as they may vary greatly month to month.  Take a stab at it anyway.

Now lets fine tune your first pass amounts using the following budget guidelines (percentages are of net income after taxes):

  • Housing = 25% – 30%
  • Food = 10% – 15%
  • Utilities = 5% – 10%
  • Transportation = 10% – 20%
  • Medical / Health = 5% – 10%
  • Clothing = 5%
  • Savings = 10% minimum
  • Debt = 15% minimum
  • Charity = 10%

Please note that these are just general guidelines that are based on my observations and experience.  Everyone’s situation is different so adjustments are expected but if you find yourself way out of a range, put some thought to what can be done about fixing that.

Another resource is provided by Dave Ramsey, personal finance and getting-out-of-debt guru.  He has created an online budgeting tool that lets you plug in your income and it applies his recommended percentages to give you a starting budget you can then adjust.

Lastly, if you want to go data CRAZY, then check out the latest consumer spending data from the Bureau of Labor Statistics.  There are several tables that show spending data in various ways (by income, family size, etc).  I find the tables by “Income Before Taxes” to be very useful.

The goal of this step is not to get it exactly right, but to get started with something.  We will fine tune our budget going forward.

Step #3: Estimate Your Spending Amounts by Category.

Stay tuned for Part 4 of the series where we will talk about tracking your spending and maintaining your budget.

 

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