Yesterday I discussed managing the income aspect of your relationship, and I casually skipped over a critical part of the combination-method equation: the expenses. In order to know how much each person needs to contribute to a joint account, you need to know how much you actually spend as a household. And that requires having some sort of budget.
I know…most people don’t like that word. Some people hate it so much they have renamed the process “creating a spending plan.” I tend to love the word, so I’ll just stick with calling it budgeting.
What is Budgeting?
At its core, budgeting involves coming up with a plan on how you will use your income to meet your expenses. It serves as the foundation to goal setting, adjusting your lifestyle, or simply getting your financial life organized. Many people have different ideas about what a budget entails and how to create one. I stand by what I said yesterday. Personal finance is about you and your life. And by just tracking your spending, you can make sure your budget fits your lifestyle.
Track Your Expenses
Spend a good three to six months seeing where your money goes. No judgments about where you should spend more or cut back; just let it be what it is. After you have a good set of data, you can dissect it and prioritize what expenses mean the most to you and where you might have to adjust your spending. After all, most of us only have so much income.
For example, if you tend to spend a lot on food but not so much on clothing, you can make sure that any budget you create accounts for that discrepancy, rather than trying to fit everything in a prescribed percentage of spending. (You’ve probably seen stats like spend no more than 30% of your income on housing, 19% on transportation, 14% on food, etc.)
This method actually got me hooked on budgeting. In law school, I didn’t have any income (lived off of student loans), so my budget involved tracking where my loan money went. I learned how to track my expenses from one of my coworkers at an internship, who introduced me to Excel. And what started off as two column, expense-amount spreadsheet, has turned into twenty-tab, color-coded, hyperlinked masterpiece that I love to sit down and play with. However, there’s no need to get that intricate or detailed. (But I’d be more than happy to share my template if you’re interested.)
Let software do the work for you
With array of online budgeting sites and computer software, it’s easier than ever to track what you spend. Ben and I use Mint.com for our joint expenses. The site does most of the work for you by creating different categories and tracking your expenses based on where you shop. Of course, you shouldn’t completely put it on autopilot since you will have to monitor the cash you spend and make sure your purchases fall into the correct categories. On many occasions, I have to break a store trip into several categories. For example, Ben and I can get groceries, household accessories, and toiletries all from one Costco trip.
Again, there’s no need to get super intricate right off the bat. If budgeting really intimidates you, start with broad categories like food, housing, transportation, etc. and then eventually work your way up to more detailed groupings like splitting the food category into groceries, restaurants, and bars. You’ll see from simply tracking your expenses, income planning, cost cutting and goal setting will fall into place.