When first creating your budget, bear in mind it really does need to be realistic otherwise there is not very much chance that you will stick to it. Even if you have the best intentions – and have all the motivation in the world to stick to it – it will still be difficult if it is unrealistic.
So how do you put together a realistic budget?
Don’t let this put you off…
… it can be time-consuming.
It is worth it though, because once you have gone through the analysis stage, you have jumped the main time-consuming hurdle.
What are the steps in creating a realistic budget?
- Print out 3 full months’ worth of bank / card statements (for all accounts)
- Grab a notebook, pen and calculator
- Analyse the statements
- Calculate the total amount within each of the spend categories you identified in step 3
- Create and populate a spreadsheet
If you do not have the first step fully because you have not spent everything throughout the past 3 months on cards (whether debit or credit), then for the next 3 months, keep your receipts for cash purchases and then in 3 months’ time you will be able to fully analyse all your bank / card statements and categorise your cash receipts to gain a proper full picture.
The two options I would suggest now, to give yourself the best and easiest way to stick to your budget – now that it is realistic and all that 😉 – is to use either the:
- Cash envelope system
- One bank account or credit card that has a good reward program like an option to earn airmiles (if you travel) or something like cash back if you wouldn’t get much use out of the airmiles. (I’m crazy about racking up the airmiles because I travel a lot!)
I thought about linking to the credit card that I use and recommending it for earning airmiles (and earning myself a few thousand airmiles in the process!) but I would prefer not to recommend something where you can get yourself into debt. Only use a credit card if you pay it off each month and you will get true value out of the reward program attached to the card.
(Just to illustrate how much value I get out of my credit card’s reward program: I needed to fly from Gibraltar to London at short notice and managed to get a business class flight to fly the next day for £10.50 plus some airmiles. A little caveat here is that on this particular airline for European flights, the business class section is only separated from economy by a curtain and you get served a meal with real (not plastic) cutlery and a real ceramic plate. Oh.. and you get that lemon-scented, hot, damp white wash cloth when boarding is complete. I was extremely lucky to get that price as I haven’t seen quite that low since!
To cut a long story short…
I am reluctant to recommend a credit card because it takes a lot of willpower not to spend on unnecessary items – “because you’ll earn the airmiles anyway” – and go for retail therapy shopping trips because you think you can treat yourself. I have only recently finished paying for a big lesson learned having that exact problem and a complete lack of willpower!
So, let’s delve into the details on each of the steps listed above:
1. Print out 3 full months’ bank statements
Print out the statements for all your accounts, debit and credit, for the previous three months. It needs to be three FULL months so that you can get a full picture when you analyse. If you want to work with four or six months – go for it but three is the minimum.
2. Grab a notebook, pen and calculator
Get a notebook, pen/pencil and calculator then sit down with your coffee and get ready to analyse.
3. Analyse the bank statements
Separate your statements into different accounts and then order them by month. So if you have four different cards, you’ll have 12 statements (three for each of the cards). Start with the first account and with the first (oldest) statement of those 3 months, working your way to the newest. Write out categories in columns on a double page spread of your notebook and go to a third or fourth page if you need more space. Begin by writing these categories and then any others, for example if you have kids, you might add categories related to them.
- Rent or mortgage, utilities, transport (for commuting or petrol for your car), medical, dental, vet, food, pet food, phone bills, internet, books, IT and phones, crafts, clothes, (or whatever your hobby or spending weak point is!) etc etc – and then add a miscellaneous column for any expenses that are irregular and don’t really fit into any other category
Now go through each of the statements and as you find a rent or mortgage-related expense, cross through it and add it to that category in the notebook. When you’ve been through all the statements for that expense, go back to the beginning and look for any expenses that fall into the next category, utilities.
And so on and so on until all your entries have been crossed through and are in their relevant columns in your notebook, including any miscellaneous spend.
You absolutely can do it statement by statement for all categories but this is just the way my logical brain prefers to do it and then I really get a handle on my real expenses.
Once you’ve been through all the statements and all the amounts have been crossed through and entered under the relevant columns in your notebook, you are ready to move onto step 4.
If this doesn’t make complete sense or you would prefer a visual representation, please let me know here.
And if you would find it easier to work with a template worksheet in the layout that I use, please fill in your email just below and I’ll send it to you. Then you don’t need the notebook 🙂
4. Calculate the total amount within each of the spend categories
Add up each of your categories to get a total for all three months, i.e. each category column will now have a total at the base of it.
Then divide each of these category totals by three (or however many months you have analysed) to get your monthly average for each category. Write that average monthly figure down next to the category title at the top.
Now you know exactly how much you need for each category per month.
Add up all the categories to get the total amount you need for your budget per month.
Are you surprised?
I was when I did this exercise. When I first did it, it showed that I needed a fair amount more money per month than I was actually bringing in!
The good thing about doing your budget this way is that you have included the miscellaneous spend so you have effectively covered yourself for any future small spending outside of your categories. AND you should have an emergency fund account with $1,000 or £1,000 in, (or equivalent in your country) so that you can cover any medical, dental, vet or other emergency bills – or at least pay a decent-sized chunk towards them.
If you do not have an emergency fund yet, please read this post to find out more about it and download the free template to be able to fit saving for your fund relatively easily – and achievably – into your budget. I’ve created the tables in a variety of different currencies, so just print out the one that’s most relevant to you (GBP, USD, EUR, ZAR – the latter I have made 10,000 due to the exchange rate). If you already have an emergency fund, you can also use these templates to save for some other goal, like a sunny beach holiday 🙂
5. Create and populate a spreadsheet
Now, armed with your printed completed worksheets or your notebook, Create a spreadsheet similar to what you have written down in your notebook. Columns along the top for your categories, rows down the left hand side for your months and each time you spend something or a direct debit is taken from your account, updated the numbers in your spreadsheet. For screenshots demonstrating this, see below:
Again, if you’d like a template of this, please download it by filling in your email below. I’m more than happy to send you a copy of the one I created and use daily (or at least almost daily) if you either don’t have the time or are not too confident with spreadsheet programs!
The cash envelope system
If you haven’t already heard of it or know exactly what it is, it’s really simple.
You go to the bank, draw out the cash for each of the categories within your analysed, realistic budget and put the specified amounts of cash in each envelope labelled accordingly…
… and then you have the willpower of a saint not to borrow from one envelope when you overspent from another!
When you spend something within a particular category, you use the cash from that envelope and put the receipt back in place (and any change).
Be really diligent about doing this with your receipts because you are no longer going to be able to track your spending from bank and credit card statements.
The other benefit to this system is that it’s usually harder to part with cash. Think about tapping a bank card for a purchase or even putting in your pin if it’s a higher amount. How many times have you walked out of a shop and thought, oh crap, how much did I just spend in there? I’ve done that too many times for my liking. And it’s NOT a nice feeling.
I hope you have found this post helpful. If you have any questions on the creation or implementation of this realistic budget please feel free to drop me a line.
Do you have any budget tips you have found worked for you? I’d love to read them in the comments below 🙂