Budget Basics – Part Three was about the mechanics of gathering your information and breaking it down into numbers and categories. This part can be tricky for people because there’s what you’ve historically spent and what you should allocate for your budget numbers.

At a later stage we will take a look at the whole budget in the context of your goals. We will also drill down to specific aspects of your finances that need tweaking or special attention. In the meantime, how do you know if what you’re setting as a budget number is reasonable?

Sometimes the dollar amount is a product of necessity. What I mean is that you don’t have wiggle room with some categories. Categories such as rent and utilities (except to cut out cable or minimize your mobile bill) are typically fixed monthly amounts. Your food expenditure is mostly within your control in that using your common sense will make the biggest difference to the amount you pay each month. Eating out, prepared and packaged foods are more expensive than making simple, well-balanced meals from basic ingredients. Likewise, what you spend on clothing is mostly discretionary. I know I’ve made ‘fashion mistakes’ – I wouldn’t like to add up that number! There are certain items you must have in your wardrobe and especially when you are beginning your career, there are many pieces you don’t have. With some planning and a list, these categories can be managed.

Here’s one way to do it. Start at the top with the fixed expenses that you can’t adjust month to month and then work through the rest in order of priority (needs to wants), calculating the minimum you think you can get away with. Use 1 column for the minimum amounts and another for the amounts you’ve spent in the past.

Here’s an example:

Lily earns $45,000 per year which converts to $3,750 per month before deductions ($45,000/12 = 3750). Assume 25% in deductions (income tax, medical & other benefits) leaves $2,812.50 per month net pay ($3,750 * (1-.25) = 2812.50). She is paid twice per month so her average net pay check is $1,406.25 ($2,812.50/2 = 1406.25).

Lily has the following monthly expenses – rent $1,000, car payment $300, car insurance $150, gas $150, food $300, utilities $200 and entertainment $400. These total $2,500.

Now, Lily is uncertain….her net pay is $2,812.50 per month and her expenses are $2,500.00 per month. She makes more than she spends … right? She should have $312.50 in her account at the end of each month. Why doesn’t she? She knows she has a balance on her credit card and she certainly doesn’t have a large savings account.

We’ll help Lily work through her budget during the next post.