How to Start With a Monthly Budget

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Reader Question: Maybe I'm over-thinking it, but one of the Type-A things I can't get past is how to START with the monthly budget. Even if I spend next month's income on paper, I still have this month to contend with, and it always seems like something pops up last minute that we need to pay for (like our well broke, etc). And then I end up needing to use that "future" income I already spent on paper for something this month. Do you just have to have one month where you're really broke in order to catch up? How do you account for the balance that's already in your checking account? Do you include that in the budget someplace? And do you guys just keep track of everything in your spreadsheet as far as categories that roll over, and things you're saving for (like your basement) or do you have separate accounts for them?

The toughest part of budgeting is no doubt starting. Think of it as Double Dutch jumping rope. You are standing outside looking for a place to jump in. Perhaps a bad example, but I've never done it and it looks like a really hard thing to do. And even when you jump in the first time, things are happening so quick and you have to find the rhythm (something I don't have) or you'll ruin the whole thing.

In order to start budgeting, you have to spend some time outside watching (just like Double Dutch). You need to observe your spending habits, and where and when your money is coming in, too. There are a few ways you can do this:

  • Online banking: Hopefully your bank has this. There may even be a tool within your online banking that will categorize your spending for you. You'll want to go through the past month or two and make sure that it has categorized things well, and fix any mistakes that are in there.
  • Mint.com: This is a great tool for keeping track of all your money/investments/loans/credit cards. I believe you could load in the past few bank statements to get started, and can look back same as online banking.
  • Budget spreadsheet: If you are using a spreadsheet to budget (we have one for free download here), you can just keep track on there for a month, filling in categories as they come up and you pay for them.

A good practice this first month would be to try to anticipate some of the flexible categories and put a projection in and see how it relates once that item is paid for. You mentioned being Type A, so I feel it necessary to lay this out there: Don't expect the budget to be perfect the first month, or ever.

You will never be able to account for all emergency items that pop up. Like your well breaking. You could never predict the exact moment that would happen.

What you can do, over time, is get better at looking ahead and setting up mini-emergency funds for items that will need replacing. We have a car repairs/maintenance category (everyone should have one if you own a vehicle) that gets $25 a month. Not a lot, but over time as we don't use it, it builds up. This mini-emergency funds should relieve stress over time as you know that when things happen you have the money set aside to pay for them.

Do you just have to have one month where you're really broke in order to catch up?

Maybe, depending on your current situation. When we started budgeting, for example, we had some expenses on a credit card we decided to get rid of. So we pulled money from our savings account to cover that and allow us to start living within our means without carrying the credit card balance as well. (See my point in this post about being a month behind with a credit card.)

So, you may need to get caught up by dipping into your savings. This was hard for us, but we believed in what we were doing. We were all in. We knew we needed to start and it was worth it for us to deplete our savings in order to kick-start our budget. The foresight was that after this initial investment, it would be much easier to manage the budget and find a routine.

In hindsight, getting going was tough, but it was totally worth it considering all we've been able to do since then (getting out of debt, saving up 6 months of expenses).

How do you account for the balance that's already in your checking account?

When we used our budget spreadsheet, there was a separate tab/sheet for our Budget Savings. So, anything that was left over on the budget, or that was for a savings category (car repairs/maintenance, Christmas, gifts, personal money, entertainment, or other savings goals) would go here. So, we were essentially putting it into a savings account within our budget and giving it a name (but the money actually stayed in our checking account).

We used to keep this in a savings account and make a bulk transfer to it every month, but now we just keep it in our checking account since it earns better interest.

If you use YNAB, it will carry over these balances for you from month to month. It makes it really nice not to have to maintain all of those savings categories. You simply plug in how much you want allocated to a category every month and it holds the balance in that category. Pretty slick.

When you are just getting started with a monthly budget, you might have some random money left over in your checking account. You could budget this into savings categories, or create a buffer category for when you need it. So, if you do have extra money in your checking account, add that to the budget for the first month so you can account for it.

Do you just keep track of everything in your spreadsheet as far as categories that roll over, and things you're saving for (like your basement) or do you have separate accounts for them?

We keep track of everything right on our budget. It's our financial control center. Everything in our checking account flows in and out of the budget. Our online banking is just for verification of expenses and to ensure that there is no fraud going on.

Because our checking account earns great interest (3%), we just keep all of our money in there, and if we are saving for something (like finishing our basement), we just create a new category on our budget and put all of our extra money there every month.

Open forum: What's held you back from starting a budget?