Some people I know are paralyzed by not knowing how to go about constructing a budget. You have two large groups of items: money coming in (Income) and money going out (Expenses). Here’s the process that has worked for me.
First, I remind myself that any budget is an estimate, not a perfect prognosticator. Something will happen that I don’t anticipate. Medical expenses are always a variable. Some years I will only have my insurance payments; other years I need additional care. I try to estimate what I expect them to be on average.
I develop only as many categories as I am interested in understanding. Now, I’m a numbers guy, so I like more detail than most people and so have more categories. I suggest starting with a smaller number and increasing them if a category becomes too much of a catchall that it hides necessary information.
For Income, one broad category may be sufficient. However, if your income is variable, you may find it beneficial to track base pay, overtime, bonus and commissions (or whatever forms your compensation takes) separately. If investments are a major source of income, it may deserve its own category.
What Expense categories do I suggest? In alphabetical order:
You may want to split several of the categories. For example, if you eat out more than once in a blue moon, it probably makes sense to split Food between eating out and eating in. If you are interested in tracking the various components of housing you can have subcategories for utilities, mortgage or rent, insurance, repairs, etc.
If Miscellaneous is too big a percentage, find some subcategories that make sense for your spending.
Notice I listed Savings as an Expense. Savings isn’t a balancing item. Savings should reflect money you invest toward retirement or your children’s education. This includes 401(k) contributions, mutual funds you buy, stocks, bonds, CDs, etc. If you have the money sitting in a checking account that isn’t investing, it’s deferred spending. You haven’t committed to saving that money!
Put down your estimates for each category. If the Expenses add up to more than 100% of Income, you will need to adjust your expenses. Work on this until it feels right. Remember to reflect year specific events, like your daughter’s braces, or the special family reunion you’ve planned.
The best way to keep track of your expenses is to use a software package. There are lots of choices, I happen to use Quicken. My one suggestion is to get the inexpensive version, which will have all you need for budgets. If you decide later on to use the software to keep track of your investments, or make a will or toast your blueberry muffin, you can upgrade later.
Collect your receipts and add them to your software database as often as you can, but no less than once a week. It won’t take much time and they won’t build up to a huge task if you do it frequently.
Many people have trouble remembering what they spend cash on. Two approaches that work are to carry a pocket notebook to record your cash purchases (and then transfer them to you software) or use a debit card, so if you forget to record something your monthly statement from the bank captures them for you.
That should get you started.