With a clearer idea of how much you are making from all of your income streams, you will now need to take a realistic look at your expenses. Often, calculating typical expenses and adhering to them in a budget is where many people fail. They find that there may have been inaccuracies in total expenses between budgeting periods, which led to overspending or a decline in quality of life while trying to maintain strict budget adherence (see “Pitfalls of Budgeting”). Additionally, if there are family members in your household, ensuring accuracy may be increasingly difficult since they have individual needs that are different from your own. It is best to remember that a budget is never perfect, and should always be reviewed and updated.

With that in mind, you will want to identify all expenses as accurately as possible in the beginning. Additionally, be realistic-- you probably will need money set aside for more than just your basic needs (food, rental or mortgage payments, transportation). Be sure to include expenditures for activities and events you know you attend to regularly, even if during this financially-focused time you consider them “frivolous” and think you have to cut them out of your spending.

Similar to calculating average income, you will need to break out those checking account statements, monthly bills, and other documentation to calculate the average costs for your expenses (you can review “Pre-Budget Setup: Average Income” for more information). Overall, there are three main expense areas to consider in your calculations, with individual categories or allocations. They include:

• Fixed expenses: These include housing (rental or mortgage payments), groceries, utilities, or car payments. Although each category may have slight variations (like utilities), you could calculate your average cost for them each month. They are considered fixed expenses, as you typically pay them each month.
• Variable expenses: Clothing, vacations, holiday or birthday gifts are all considered variable expenses as you may spend for such items or events each month, but the specific amount varies. Variable expenses is the area in which many people are least likely to track spending, and thereby most likely to overspend. However, by checking receipts, statements, or credit card bills, you can get a grip on how much you’re actually spending, and then use average to control purchases.
• Periodic expenses: Car registration or other one-time annual payments are considered periodic expenses. They are often forgotten in budget calculations, but if properly incorporated into a budget, they can be paid with cash when due as opposed to using credit.

After calculating all three areas of expenses and their categories, you will need to incorporate them with your average income. This may be different depending on the type of budget you decide to use. See “Pre-Budget Setup: Fine-Tuning Income and Expenses” for more information.

References:

Chicagofed.org. How to Budget and Save
Gettingfinancesdone.com. 3 Reasons Most Budgets don’t Work
Gettingfinancesdone.com. What is a Zero Based Budget
Erin Huffstetler. Debt Free Living