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Budgeting is the fine art of managing your money.

Over the next couple of days this blog will focus on setting up and maintaining a workable budget. I will explain in detail the process I use and provide links to additional information.

If you haven’t read my post “Two Unbreakable Rules for Budgeting” I recommend starting there.

In order to set up a budget, you must review your current expenses. Hopefully, you are using software like Quicken, Mint or iBank to track your spending. I use Quicken and love how easy it makes organizing my personal finances.

If you are not currently tracking your spending, you need to start. At bare minimum write down your estimated prior month’s expenses to use as a starting point.

How to Categorize your Expenses

Review in detail your spending over the last three months. Look at every transaction and categorize your spending based on the categories below.

1. Savings/retirement (paying yourself)
2. Fixed Expenses
3. Discretionary Fixed
4. Irregular Expenses (Annual/Quarterly)
5. Fun Spending

I know it sounds like a lot of work, but once you break down the categories it makes it very easy to keep everything organized.

1.  Savings/retirement

My budget always starts with paying my tithing and then paying myself. Sometimes paying myself is only $25 per month, other times it is a few thousand. It isn’t so much the amount, but the consistent habit of saving money.

Check out these blog posts for more on how I set up my savings and retirement accounts.

2.  Fixed Expenses

This category includes any static monthly expenses and includes all the stuff I hate paying.

• Mortgage payments
• Car payments
• Life insurance
• Medical insurance
• Car insurance
• Some Utilities (Cable, Trash, Internet, Phone)
• HOA Fees

I like grouping these expenses together since they are the same amount each month. It allows me to adjust my discretionary spending based on the remaining amount.

3.  Discretionary Fixed

This category also includes any monthly expenses. However, this is for expenses that vary based on the month but are still a top priority.

• Utilities (Power, Gas – any utility that changes based on usage)
• Food
• Gas

These expenses tend to shift frequently for me and have to be adjusted monthly.

Prior to the beginning of the month, I review our calendar and base this portion of our budget on our upcoming plans.

For example, if we host Thanksgiving or Christmas dinners my food budget will increase significantly. We also do a lot of boating during the summer months, which always increases our gas consumption.

This is also one of the columns that can be adjusted quickly if we have an unplanned expense hit.

4.  Irregular Expenses (Annual/Quarterly)

This category is for the annual expenses that used to always sneak up on me.

• Property taxes
• Car registration
• Warranties
• Taxes
• Christmas/Gifts
• HOA Fees (mine are assessed quarterly)
• Scheduled Vehicle Maintenance (Oil Changes/Tire Rotation)
• School Registration
• Medical Co-pays

At the beginning of the year, I add up all of the miscellaneous expenses that I know will hit at various times during the year. I typically add $500-1,000 to this number for anything I’ve forgotten and then divide this number by 12 and save this amount each month.

I use a completely separate savings account for this fund. I don’t want it mixed in with my regular accounts.

This is the fund that I have to monitor very closely. It is very tempting to steal funds from this account when something comes up last minute.

There are months when I don’t touch this fund and then I may get hit with virtually everything at once.

5.  Fun Spending

This is where I put all the stuff that makes life worth living. This is also the category that gets funded last. For me it includes stuff like:

• Entertainment
• Dining Out
• Travel
• Clothing
• Gym memberships

Regardless of how tight your budget is, always include a little bit of fun money. There were times in my life when this was as little as $25 a month.

The important thing isn’t the amount, but the freedom to use the money for whatever you want, whenever you want.

The trick is to make sure that you don’t overdo this area. Plan out all the other expenses first and then use the extras to fund this account.

Conclusion

Your categories will most likely vary from mine.  You may consider your gym membership a fixed expense – that is okay.  The important thing it to capture all of your expenses in one of the five major categories.

Once you have categorized all of your expenses you are ready to actually make your budget.

Check out the second part of this budgeting series which goes into detail on setting up a zero-based budget.

Please comment below if you have any recommendations on additional categories or ways to organize your expenses.

***Shortly after I wrote this post my husband’s company went out of business.  Fortunately, we had just completed our 6-month emergency fund and had paid off $293,000 in debt.  I wrote a post How We Paid Off $293,000 in Debt in Five Years that talks about our experience. We couldn’t have accomplished this without making and sticking to our budget.

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