Analyzing Your Spending
Have you been tracking all of your expenses? We went over the importance of this in PART ONE of this series. If you haven't written out your expenses, make sure that you grab a notebook or set up an Excel spreadsheet and track every single dollar that you spend. You should at least capture a month's work of expenses prior to doing the analyzing below.
Once you have put together expenses from the last month, set aside some time, and gather all of your information in one place. Then, by category, determine how much you have spent in the month. You can create your own categories based upon your own personal situation, but some examples are home, auto, student loans, groceries, eating out, heating & cooling, clothing, tuition, etc.
- First, look at each category and see if there are any surprises. Are the expenses what you expect them to be? You may find that you are spending more on a particular category than you'd like. Being aware of your spending and your issues is absolutely important, and the first step in setting your budget. Take note of any areas where you are looking to improve, and focus on those areas. In future columns, we'll review each category in depth.
- The next step is calculating your budget. Some categories are simple - for instance, if you owe a certain amount on your mortgages, car payments, etc, that should be your starting point. Go through each line item and figure out what you should be and what you are comfortable with spending. You can start with a monthly budget, but your budget should vary by month. In the winter months, your home heating bill should be higher, for example. You must also include items that do not occur every month - such as oil changes, landscaping, home maintenance, etc.
- When you create your budget, of course, you should start out looking at the amount of money that you are making. Regardless of your situation, your income should be higher than your expenses, and you should always "pay yourself first" - ie: put money into savings, especially retirement savings, first. When you are done, you have your first draft of your budget!
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