Ryan

Basics: Baseline Budgeting

Once you’ve established your spending log and used it for awhile, you can take a look at your overall budget. Your baseline budget is the one that you’re currently using (you can take a look at my baseline gas use for an example of what a baseline means).

In addition to your spending log, you’ll need your income; for this I would include any earned income (from your job, for instance) but not unearned income (dividends, capital gains, or interest) unless you actually use it for your monthly expenses. If, like me, this income is reinvested, I wouldn’t use it in my budget. If you have other types of income such as welfare or Social Security, or income which is not cash but can be used like cash in some aspects (WIC or food stamps) you would want to consider that income for this exercise as well.

You’ll want to take a look at your spending log and create some categories; what they’ll be may depend somewhat upon your own situation, but in general things like “food”, “rent/mortgage”, “electricity”, “gasoline”, “toiletries”, and “entertainment” would be included. Depending on your situation, you may want to break things down further–you may want to subdivide “food” into “groceries” and “eating out”, and “eating out” may even warrant further division such as “McDonalds” and “fine dining” and “Starbucks”.

Once you’re done with laying that out, add up your net (not gross, at least not at this point) income as well as all of your expenses, and use the cash flow equation we talked about earlier to see where you’re standing.

When people do this exercise, they are sometimes surprised by their number. Sometimes they have a very large positive number that doesn’t seem at all accurate; sometimes they have negative numbers that don’t seem to make sense. Take a few minutes and make sure your math is correct.

When you have the baseline budget established, it’s time to take a hard look.
Where are you spending more money than you want? What areas can you cut back on? Maybe have a specific goal, like, “I will spend 10% less on eating out this month,” or, “I will reduce my Starbucks visits from five a week to one a week over the next three weeks.” Are there ways to work on the other end of the equation and increase your income? Once you have your baseline established, it becomes much more concrete to work on financial goals because you know where you stand and you know where your money is going–and what areas it might be possible to make changes in. That will lead to your goal budget, which we’ll look at in our next installment of Basics.

2 Responses to “Basics: Baseline Budgeting”

  1. [...] saving vs. debt reduction argument, it’s pretty much a necessity you’ve examined your baseline budget and gotten a handle on your cash flow. If you’ve not done these, do so first! Once [...]

  2. [...] Since we’ve established a baseline budget, it’s time to come up with some goals for your budget. A goal budget is what you would like to be spending each month. Typically, when a baseline budget is established, we see some surprising numbers. For instance, when I did a baseline budget years ago, I discovered I was spending $50 a month on soda rather than the $30 a month I expected. While $20 a month isn’t a significant amount, spending 67% more than I believed I was in any category tells you that your perceived budget is not as near to reality as you need it. These types of expenses–the ones where you are spending more than you thought you were–are the best ones to target for early success with your goal budget. See what you can do to reduce spending in that area. If I’m spending $50 where I thought I was spending $30, I may target $40 a month as an initial target. Something helpful in terms of this type of budgeting is that if you thought you were spending less, you probably can at least approach what you thought you were spending. [...]

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