Accountant Miami: One of the reasons budgets fail is because a crucial first (and ongoing) step is missed in the budgeting process: tracking your expenses. If you don’t know what your starting point is, then there’s little chance that you’ll be able to harness your cash flow to your benefit.
Here are a few tips to help you track your expenses effectively, then transform your current cash flow into a well-oiled budgeting machine.
Step One: Don’t Budget
As funny as it sounds, your first task in creating a budget is not to budget. Instead, continue to spend as you normally do (assuming that your spending isn’t too exorbitant to begin with).
This gives you a realistic starting point and a benchmark upon which to build and track your budget going forward.
Use a Spreadsheet (or Equivalent)
Each time I whip out my wallet, I record the money I spend in a notebook that I keep in my purse. It’s an easy habit to get into, but keeping track of hand-written ledgers doesn’t make cash flow data very easy to interpret or manipulate in the future.
To create a spreadsheet that allows you to analyze your data, past, and present. Across the top, I set up headings with the various categories of spending I want to track (e.g.: Rent, Utilities, Transportation, Debt Payments, Investments, Groceries, Phone, Internet, Insurance, Entertainment, Gifts, etc.).
Below each heading, I enter each expense incurred into rows along with the date and a brief description of the expense in the adjacent columns. Further down, I have a row that automatically totals the amount recorded under each heading.
You can create a separate spreadsheet tab for each month, or you can record all the data on one sheet, using running totals. I tend to prefer creating a new tab each month so I can view month-over-month data easily. Others prefer to organize their data by category instead of by month, creating a different tab for each category.
As an alternative to using a spreadsheet, some accounting software programs and online budgeting sites have user-friendly ways to track your expenses, in addition to applications for smartphones that negate the need for handwritten ledgers. Simply choose a vehicle with a format that makes sense to you, which allows you to view and track your spending.
There’s no point in tracking your expenses if you aren’t honest with yourself about them! So don’t forget to record everything – absolutely everything – including the odd coffee or pack of gum you buy. You might be surprised to discover just how much some of the little expenses are throwing your budget off.
I round my expenses up to the nearest dollar instead of recording them down to the cent. Although it may put my budget a bit askew by several dollars each month, I’d rather overestimate than underestimate my expenses.
Analyze Income over Expenses
Once you have tracked your expenses for a few months, take a look at your spending habits. Are they steady? Are you surprised by anything? How does your spending compare to your income?
Step Two: NOW, Create a Budget
It’s only once you have a handle on your current expenses that you can create a realistic budget. Assuming you’re using a spreadsheet, create a row below your running totals with a target amount that you want to spend in each category for the month.
Some expenses will be fixed each month, so those target amounts are easy to enter. In other more discretional categories, you can decide how much you can afford to cut back (depending on how much money you wish to shave off your cash flow).
Irregular expenses (like annual or semi-annual payments) can be amortized over each month, or specifically budgeted for in the months that you know you will incur those expenses; it’s up to you.
Step Three: Keep Tracking
The only way you’ll know if you’re on budget each month is to continue tracking your expenses! Do this regularly throughout the month (I do it at the end of each day so it doesn’t accumulate into an onerous or time-consuming task).
The additional advantage of tracking your expenses on a running basis is that you can see how close to your target budget amounts you are coming as the month progresses. If you notice you’re likely to go over-budget in one category this month, then see if you can “find the money” from another category where you can cut back your target amount proportionately.
It’s this ongoing tracking of your expenses that will keep you on-budget, and allow you to continue to tweak the budget going forward. Because nothing in life is static, least of all our spending patterns. By tracking your expenses, you can create a budget that will breathe and evolve with your life.
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