Budget. A “four-letter word” (for many people) that actually has five letters. If we did a poll to find the most dreaded word in the English lexicon, it would be a tie between “diet” and “budget.” One of my goals at SimpleMoney is to alter your mindset about some of the “dreaded” aspects of personal finance. Let’s start by reframing budgeting.
The best starting point for creating a budget is to have your cash flow statement already built and ready to go. If you have done that, then you already have a solid budget in place, or you’re ready to create one quickly.
If you have not built out this preliminary statement, here’s how to build a cash flow statement.
You can also download our simple, beautiful, and free template for your cash flow statement and fill it in digitally or print it and fill in the statement on paper.
To clarify, a cash flow statement and a budget are not the same thing. A cash flow statement is like the rear-view mirror on your car. It gives you a view and an understanding of what has already happened in your financial life. A budget, on the other hand, is more like the car’s windshield. A budget is created to plan for what’s on the horizon and gives you a view of the financial road ahead. I go into greater detail about the differences between and budget and a cash flow statement here in this post.
A common obstacle to creating a budget is a lack of data to build it. As a result, you just don’t know where to start. Here are two options to consider.
Brainstorm categories and use last year’s data
The first step in creating a budget is to build out your categories of expenses. You can use the cash flow template above to get started. In essence, this is also the same way you would build your cash flow statement.
Once you have identified your categories, review your credit card statements, checkbook register, bank statements, and any other records you have to determine estimated amounts for each category. Since you are conducting this backward-looking research, you can easily create a cash flow statement along with your budget!
Now you’re able to record actual total expenses for the year in each category for the cash flow statement, as well as create estimates for each category for the coming year to build your budget. Make sure to account for categories that are no longer part of your life as well as new expense categories that have cropped up for the current year.
Brainstorm categories and start with this month
Feeling too unmotivated or overwhelmed with the prospect of all that data mining? Don’t despair. Start where you are right now and take things a day, a week, and a month at a time. The first step is the same – brainstorm your categories. Then insert estimates for each category based on your best recollection.
As the month progresses, update your estimates based on your spending during the month. This “living document” is a different type of budgeting, because you modify it as you go along.
While this method requires a few months to get enough data and build a framework to forecast expenses in the future, that doesn’t really matter. What matters is you are tracking and evaluating the expenses along the way.
When it comes to creating and using a budget, there are no hard and fast rules. If you like a challenge and have good records, examining the past year is the best approach. If you simply can’t commit to spending some quality time with a year’s worth of data, just get going where you are right now.
Starting on the first day of the year or the first day of the month is unnecessary. Because you are near the beginning of the month today, just look back a few days to “catch up.” Even if you don’t get around to this exercise until the middle of the month, just start. Eventually you will have several full months of usable data.
Don’t let a lack of data be the obstacle that prevents you from creating a budget. The magic is this: Just the sheer attention you pay to your spending will point you in a better direction. Paying attention is key.
I’ll have more budget techniques and ideas to share in the coming weeks. Meanwhile, feel free to share your best techniques below. We can learn from each other!