Money Matter$: The ABC’s of Budgeting: Budgeting Basics

Many of you who are reading this may not like what you hear! You may get grumpy or even trigger a headache when I say this, but “You need a Budget!”
It doesn’t matter if you are a civilian, new recruit, or an officer with 20 plus years of service; it’s important to know where your money is going if you want to have a handle on your finances. Many people believe that budgeting requires a restricted no frills life and that’s just not true. I promise, you don’t have to eat ramen noodles every night nor eliminate all the fun activities from your life.
Budgeting is knowing how much money is coming into your household, where it is going, and then deciding where to direct the funds to achieve your personal financial goals. When you don’t have a budget in place you may experience some of the following:

1. An increase use of credit and a rise in debt;
2. A rise in unexpected expenses putting you in the negative;
3. Not knowing how much cash you have left at the end of the month that could be saved;
4. Unnecessary spending;
5. Not reaching your Personal Financial Goals.

So, while you may not like the dreaded “B” word, ignoring the creation and implementation of a budget in your daily life can cause unwanted financial outcomes. What can we do to ensure we reach our goals to stop overspending as well as break the paycheck-to-paycheck cycle?   
Keep reading this post as we will discuss the budgeting basics.
First, let’s define the word budget.  A budget is simply a road map for where your money will go.  Budgets assign your money a job and establish spending limits for specific expenditures in order to use your money wisely.  Ultimately, you can begin to make your hard-earned income start to work for you.

Now that we know what a budget is, let’s move forward with creating one. Unfortunately, with most things in life getting started may seem complicated, but this post and steps below should help jump start the budgeting process. Also, keep in mind the steps and suggestions below were created with a beginner budgeter in mind.
 
Step# 1:  Calculate your monthly income

One of the first things you want to do when putting together a budget is to determine your monthly income. Having an accurate account of how much money you have per month will help you make better decisions with how to deploy your dollars. Be sure you are using your monthly take-home pay (this is your pay after taxes) when calculating your monthly income for budget creation. Also, be sure to account for all income sources coming in monthly.

Step# 2: Add up all those “Fixed Expenses”

Fixed expenses are those items that you pay regularly. Normally, the amount that is paid remains the same from one period to the next. Some items that can fall under fixed expenses are: your mortgage or rent payments, vehicle loan, student loan, insurance payments, etc. Once you have compiled a list of your recurring fixed expenses for a monthly basis, it’s time to add them all up.

Step# 3:  Identify and Add Up Your Variable Expenses

I consider this part of the budgeting process the most critical. This area requires a lot of attention as variable expenses are the transactions that vary month to month. If not tracked properly, variable expenses may cause a deficit. Some examples of variable expenses are utility bills, grocery costs, entertainment related purchases, fuel, eating out expenses, etc.

How do you track these variable expenses to add to your budget?

One of the ways that has worked best for me is to look at my history. I simply grab my past three months’ worth of bank statements, pull out each line item transaction and put them into categories.  For example, if your first transaction is a purchase at a gas station for an amount of $40 dollars, you will create a column/category titled fuel and write the amount spent of $40 dollars in that column.  This is the process you will follow for each line item transaction until you have placed all transactions for the three-month period into a column/category. Once this critical step is complete you will add up each of your columns to get a total spent for each category.  

Here is an example of how your categories and columns may look:

Step# 4: Build the Budget
It’s now time to build your budget. This is where you subtract your total fixed expenses from your monthly take home income. This total will represent the amount you have left over to spend on your variable expenses as well as put into savings. Thus, you will want to allocate the amount that’s left to your wants, savings, or other investments. 

If you find that you have run out of money at the end of the month, it’s time to take a look at your variable expenses and identify the area where you have overspent and make an adjustment. Keep in mind that you have to be honest with yourself when creating a budget. For example, if you allocate an amount of $200 per month for groceries but your average grocery bill is $400, this would not be a reasonable allocation as it’s causing you to break your budget.

Step# 5: Track your progress
To help ensure you stay within your budgeting plan and not fall back into unwanted financial habits, be sure to go over your spending and saving allocations for the prior week and if need be, make the necessary adjustment for the upcoming week to stay within your budget.

If you considered yourself an over spender, or were simply left without any money at the end of the month, a budget will help if set up properly. The goal of the budget is to help you live within your means and is tied to your goals.

Available Resources

For assistance or questions regarding budgeting, contact your local personal financial manager (PFM), your assigned command financial specialist (CFS), or a CG SUPRT Money Coach for more information.

For additional resources and information on the Personal Financial Management Program, please visit their website.

About the Writer:
Chauncey Green is an accredited financial counselor (AFC) and serves as the personal financial manager for District 11 with a home base in Alameda, California. Green has been helping military families with personal finance since 2016 and has been in the financial services industry for over 18 years.