So far we’ve explored expenses, income, and balancing your accounts. This week we’ll take a look at simplifying your expenses into spending categories and next week we’ll develop your budget.
Note: This is the fourth post in a five-part series. If you missed the first three, click the links below to review them before moving on to this step.
Part 3: Balance Your Checking and Savings Accounts
Here’s an overview of our steps to creating a budget:
- Write down your expenses.
- Write down your income.
- Balance your checking and savings accounts, including cash on hand.
- Determine your spending categories.
- Create your spending and savings plan (aka, a Budget!).
Last week I challenged you to find ways to close the gap between your income and expenses. Did you take some time to discuss those ideas with your spouse or trusted friend or family member? Great! If not, take a few minutes to do that now.
Okay, now on to step 4, determine your spending categories.
In this step you will group all of your expenses into a handful of categories and then number them by priority. We’ll start with 12 major categories and break them down from there. The 12 major categories are (in no particular order):
- Charity
- Saving
- Housing
- Utilities
- Food
- Clothing
- Transportation
- Medical/Health
- Insurance
- Recreation
- Personal
- Debts
On a separate sheet of paper, write each of these categories down, leaving enough space to add in some sub-categories under each. The sub-categories may be as follows (many of these may or may not apply to you, but write them down anyway for the first time doing this):
- Tithes; Charity and Offerings
- Emergency Fund; Retirement Fund; College Fund
- Mortgage/Rent; Real Estate Taxes; Repairs/Maintenance; Association Dues
- Electricity; Gas; Water; Trash; Phone; Internet; Cable
- Groceries; Restaurants
- Adult’s clothing; Children’s Clothing; Dry Cleaning and Laundry
- Gas & Oil; Repairs and Tires; License and Taxes; Car Replacement
- Medications; Doctor Bills; Dentist; Optometrist; Vitamins
- Life Insurance; Health Insurance; Homeowner/Renter Insurance; Auto Insurance; Disability Insurance
- Entertainment; Vacation Fund
- Child Care; Toiletries; Education Expenses; Child Support; Alimony; Subscriptions and Dues; Gifts; Furniture Replacement
- Car Payments; Credit Cards; Student Loans; Personal Loans
Now go through each of your expenses from step 1 and write them next to the appropriate sub-category. The result should look similar to the picture below.
Okay, let’s go back now and number those categories in order of priority. When creating your budget in step 5 it’s important to know which category needs to be funded first and which category is a luxury that only gets funds once everything else is paid for.
With your spouse, determine what your priorities are for your money. It’s important that you and your family have shelter (housing/utilities), food, clothing, and transportation, so start with those at the top. I also believe that tithing and charity are important, because God does bless those who give. Once your family’s immediate needs are taken care of, prioritize the rest of the categories based on your family’s lifestyle. For example, let’s say you don’t have an emergency fund but your family is healthy, and everyone has clothing to wear. You could prioritize your spending as follows:
- Charity (tithes first, then offerings)
- Housing
- Utilities (Electric, gas, and water being the most important)
- Food (Groceries take priority over eating out)
- Saving (If you don’t have $1000 saved, this would take priority right after immediate needs are met)
- Debts (especially important to tackle credit card debt once your immediate needs are taken care of and you have $1000 saved in an emergency fund)
- Transportation (this could be purchasing fuel and paying for repairs of your own vehicle, or purchasing public transportation)
- Personal
- Clothing (If your family has clothing to wear, this should be less of a priority than saving)
- Insurance
- Medical/Health
- Recreation
Okay, now you should know where your money is going, how much money is coming in, the balances of your main accounts, and where your money should be going. Next week we’ll finally put together your budget. In the meantime, continue acting on ways to close the gap between your income and expenses. Have a meeting with your spouse or trusted friend or family member and discuss how your spending and income has changed over the past few weeks and what you could do to continue to work toward your goal of financial freedom.
If you’ve made it this far, you’re doing great and I’m proud of you! If you have any questions about this step or any of the others (or budgeting and finances in general) please feel free to reach out to me or schedule an appointment to speak with me. Have a great week!