Budgeting Part 1: Let’s start at the very beginning…

a very good place to start. When we read we begin with A, B, C. When you take control of your finances you begin with bud-get-ing!

Please forgive me, Goddess Julie Andrews, for butchering the song you made so famous.

I love budgeting, and it really is deceptively simple. You’re not doing any more complicated math than you were in kindergarten. While many prefer tech-y ways like YNAB or Mint, I make mine old-school: on paper.

Start by sitting down (with your partner, if applicable, as Julie and Christopher are modeling for us above) and pulling up your last 2-3 months of bank or card statements. Jot down how much you’re spending on everything. Figure out not just how much your water and electric bills have been for the past few months, but how much you spend on coffee or movie tickets or Lyft/Uber.

You need to do this before making a budget so you’re aware of your typical spending. You can write down a $40 budget for your water bill all you want, but if you’ve been spending $55 on the dot every month previously, your budget isn’t going to work. If you make a budget without realizing you’ve spent $80 on takeout in the past month, it’s also going to fail. You have to know where your money’s going.

So now you’ve got a bunch of typical totals for different bills and expenses. Next, we want calculate an average amount for each expense, label them (for example, coffee meetings, movie tickets, and your Netflix subscription might all be labeled as “entertainment,” while gas, water and electric might all be “utilities”) and place them in one of three categories.

  1. The first category is non-variable non-discretionary. These expenses are consistent every month (not negotiable in price in any way) and not optional. For us, this is our mortgage and nothing else. At this point, we don’t have any feasible refinancing options and aren’t going to move, so this isn’t changing at all and obviously has to be paid every month.
  2. The second category is variable non-discretionary, and you might be surprised by what I’d call variable. Our car payment, though it’s the same every month and an amenity we consider mandatory for now, is something I consider variable because it could be reduced with a cheaper car. In fact, that’s something we argue about almost every month (to be expanded upon in a future post). Our utilities also go here, not just because they’re slightly different each month, but because they’re something we could work harder to reduce if absolutely necessary. Other stuff in this category: student loans (sometimes we pay more, could negotiate lower payments in a pinch), groceries (can always have a more frugal “rice and beans” month), cell phone bills (can drastically cut plans in a pinch). I also put savings in this category, as we could always cut those back. Basically, this category is for anything you consider mandatory, but that still has some wiggle room.
  3. The third category is discretionary spending. This is stuff that’s totally unnecessary. For me, this includes occasional meetings at coffee shops with my colleagues or the incredibly dangerous and budget-busting trip to Sephora. For Mr. Millennial Money, it’s a video game or stop at Chipotle. These things are definitely on the rarer side for us.

The idea behind categorizing these expenses is to make it easy for you to see how much of your spending is unnecessary and to help you find where it would be easiest to cut if you need to.

In my next post, I’ll show you how to put all this together into a budget! For now, how did this feel for you? Were you surprised (either pleasantly or unpleasantly) when you reviewed your spending habits?

 

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s