Create a "good enough" personal budget in 3 steps

Creating a budget is painful. It's been about two years since I last tallied my monthly spending and earning. Over that time, both my income and spending habits have changed - not a lot, but enough that I don't know if my current cash flow will break even over the long term. Coupled with modest raises, I'm also trying to save more money - and I've moved closer to my city's entertainment district, which, naturally, means it's more likely for me to do things like eat out and socialize more.

What held me back from creating a budget was the time and energy I thought it would take. That is, until I just started building one slowly over time - and realized that if I'd concentrated on each step individually, I'd have started a lot sooner.

Since I'm not trying to register for an IPO, I don't need to know the precise details. I just want to know, for instance, whether it's okay for me to spend $100 a week on fun - dinners out, movies, drinks - or whether my cash flow is enough to sustain double that or (hopefully not) half that. Or, conversely, whether I've got the means to sock away an extra $100 a month over what I'm already saving.

Here are the three steps that, if you tackle them one at a time, will help you create a budget that's both realistic and detailed enough to keep your spending in check.

1. Brainstorm all your spending habits.

This first step is the key step - the one that usually stops people cold or seems so daunting that they procrastinate indefinitely. The key is to realize that you don't have to do it all at once - in fact, it's better if you don't, because if you try to do it in just one sitting, you'll probably forget more than half of your expenses.

First, do set aside 10 minutes to sit down at your computer. Create a list of all the things you remember spending money on last year and expect to spend money on this year. It doesn't matter what program you use - if you don't have Excel, Notepad is good enough.

Then, after your initial few minutes of brainstorming, where you'll think of most of the obvious stuff, give your brain a few extra days to remember all the other stuff.

While the big items - rent or mortgage, car payments, groceries - are important, the little things quickly add up. Don't forget the money you spend hosting your web site, dentist bills, Christmas gifts, money you want to save for a vacation, trips to visit family, parties you host, or that tooth-whitening you're planning.

Give yourself lots of time - spend maybe a full week jotting things down as you think of them. Email yourself from work as you think of more items. Write a note on a piece of paper if you aren't near a computer, then add it to your list later. This is when you'll think of those costs that you have infrequently, but are still regular enough that you should include them in your budget - like the two pairs of running shoes that I buy each year.

Most importantly - don't try to do the math yet. Unless you're an obsessive, left-brained statistician, that'll just discourage you from completing the budget.

Here's a portion of what my list looked like a few days into the brainstorming, in case it helps jog your memory. Note that (1) everything is still in random order, (2) some have approximate figures beside them, while others don't, and (3) I've also noted some items, like a bus pass, that I don't currently need, but might need later.

Contacts - $100 every six months
Glasses - $350 once every two years
Upcoming home improvement costs?
Web site hosting
Car insurance - $89 per month
Condo insurance - $260 a year?
Gas - $40 estimated per month
Car fixes - scheduled (oil) and unscheduled - $600 a year?
Christmas gifts
Weekday lunches - regular (sandwich, etc.)
Weekday lunch - special (sit-down lunch)
Coffee, snacks - $45 a month?
Eating out in the evening
Entertainment - weekend
Entertainment - weekday
Hockey games
Movies, popcorn
DVD rentals
Music lessons - $180 a month
Music equipment
Newspapers - $23 a month
Phone - land line
ADSL line - $45 a month?
Cell phone
Long distance phone bill
Disability insurance
Dental fees
Groceries
Electric bill - $23 a month?
Regular registered retirement plan savings
Extra retirement savings, if room
Non-registered savings
Personal contingency fund?
Soccer fees, equipment - $300 a year?
Clothing budget - no idea yet
Running shoes - two pairs per year
Medical insurance - currently covered by work
Dental insurance - currently covered by work
Bus pass - currently don't need one
Automobile club fees
Fresh fruit in summer - for freezing
Bike costs? (not currently using bike)
Cable TV - not currently using
Haircuts
Special items: tennis racquet, balls
Flights to visit family - $400 once a year; rental car - $100 per day
Hosted parties, big dinners - twice a year, $400 total?

2. Calculate your spending by month.

Okay, now it's time for the math. When you haven't thought of any new line items for about two days, sit back down at your computer and look at your list.

If you like, you're welcome to group your items by category, but even that's not absolutely necessary.

Go through the list and amortize everything monthly, over the course of a year. For instance, if you guess that you'll spend $800 for Christmas gifts in December 2006, then divide that by 12 to about $67 per month.

For expenses that I pay for weekly, I usually multiply by four and then add 10 percent to the total to get an approximate monthly figure, which buffers it a bit to be on the conservative side. Example: $100 of groceries a week is about $440 a month.

Tally up your monthly costs for a total, and it should look something like this:

$67 - Christmas gifts:
$440 - Groceries
$40 - Gas
$89 - Car insurance
$25 - Soccer fees
.
.
.
$XXXX - Total expenses

Again - no fancy tools needed - Notepad is good enough.

3. Figure out your monthly income.

This should be dead easy if you get pay statements, or have an otherwise regular monthly income. If not - well, it sucks to be you...but now that you've done all the work for the first two steps, you might as well finish off the budget and calculate your expected monthly earnings. Just divide your income for the last year by 12 if you have to.

Most likely, it will be easiest for you to do your budget with after-tax figures, so for your income, only count the actual dollars that you see. Like adding carrots to the proverbial stone soup, if you really want to enhance this budget, you can use your pretax income and then include tax payments in your expenses - but I don't. I just estimate the tax return I think I'll get and add that to my monthly income by dividing it by 12.

Bonus step: 4. Refine your budget.

After the first three steps, everything should fall into place so easily, I'm not sure this step is even worth mentioning, so I'm not counting it in the total. In any case, here are a couple of pretty obvious ideas:

- Estimate how much you need to save in advance every month (for things that you pay for on an irregular basis, like Christmas gifts, vacations, and unscheduled car fixes). Make a note to keep it separate from the rest of your cash during the year - perhaps by automatically tranferring that amount into your savings account.

- Change the figures for your variable expenses, like your clothing and entertainment. Depending on how much breathing room you have, move the figures up or down, and make an effort to stick to these limits. No doubt this is easier said than done.

(Disclaimer: Of course, these steps - or creating any budget - will work best if you have a fairly regular paycheck or source of income. If you're a freelancer with a highly fluctuating income or otherwise don't have a way to estimate your paycheck, well, there's only so much you can do. Hoarding and subsistence living are two things that come to mind.)

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