expense jars

How to Budget – Understanding Your Expenses

In How to Budget Series by Phil McGilvrayLeave a Comment

How to Budget Principle #1

One of the most important steps when it comes to setting up a successful budget is investing time in gaining a true understanding of your expenses.

Too often do we turn to budgeting at a point of financial crisis. The pressure is on to pay the bills, we need a budget and we need it now! In our hurry to pull off a financial miracle, we deliberately leave some expenses out, completely forget some, and naively underestimate others.

A budget will only ever be as good as the information you put into it; if you put incomplete data and half-truths into the budget you are setting yourself up for failure.

In this blog, I will take you through the process I take all my coaching clients through to help them gain a comprehensive understanding of their expenses. It’s not rocket science, but if you complete the four tasks I outline below, you will have a fantastic starting point.

The first thing you will need is a comprehensive list of the expenses found in a typical budget. Without a prompt list, it is so easy to forget even the most obvious of expenses.

Whenever I give these worksheets and homework tasks to new coaching clients I do so with the warning that this is my first test of how serious they are about getting their finances sorted. I don’t expect perfect but I do expect thorough. If the worksheets come back half-heartedly completed I am unlikely to proceed with the client. As you approach these tasks, give them the time and focus they deserve to give you a true and honest picture.

Okay so let’s get started:

Task #1: Start an Expense Journal

For the next month, record everything you spend your money on, and I mean everything, no matter how big, small or one-off the expense may be, you need to write it down. Most of my clients find this task quite confronting as it opens their eyes to how much money they really spend on their everyday lifestyle expenses. As ‘one-off’ expenses the coffees, bought lunches, take away and unstructured grocery shops don’t seem too bad, but when you add them up over a month it can be pretty scary!

Task #2: Go through 12 months’ Worth of Bank and Credit Card Statements

The purpose of this task is to help you identify your direct debits, bills, and less regular expenses. As you go through each statement there are four things you are looking for:

  1. What are my expenses
  2. How much do I need to allocate to each expense
  3. How frequent is each expense, and
  4. Where appropriate, what is the next due date for each expense.


Task #3: Complete a Gift List

I know this may seem like a really random task to include here, but in western society, spending on gifts is out of control. Whether real or perceived, there is an expectation that we spend ridiculously large amounts of money on gifts and treats for our friends, family, and especially our children.

To save you time, you can download our ‘Gift List Worksheet’ or create your own. To create a gift list, simply draw 4 columns down on an A4 piece of paper. In the first column, write the name of every person you anticipate buying a present for over the coming twelve months. Label the second column ‘Christmas’, the third ‘Birthday’ and the fourth ‘others’. In each column write how much you plan to spend against each person on each occasion.

‘Other’ can includes things like Mother’s day, Father’s day, engagements, weddings, babies, graduations and so forth. Also, make sure you add a few ‘others’ at the bottom of the list of names because you can be certain there will be someone who unexpectedly gets engaged, married, leaves work, or has a baby throughout the year ahead.

Once you have completed your list, total how much you spend under each column. Most of the clients I work with are shocked by how much their gift spending adds up to over the course of a year.


Task #4: Use Your Data to Fill in an Expense Worksheet

Now that you have thoroughly completed the three tasks above you should know what all your expenses are; you should know how much they are, when they are due and how frequently they occur. Take this information and complete the Grandma’s Jars ‘Power of Budgeting’ worksheets.

Have completed these 4 tasks you should now have a comprehensive understanding of your expenses. Even with this thorough process there will still be some expenses we have forgotten and others we have underestimated but they are unlikely to be significant. That’s okay. Over time we will continue to improve the budget, and with every small change it gets closer to reality. What you have now, however, is a fantastic foundation for a successful budget.

Once we have our income and expenses accurately mapped out we are in a great position to identify what our savings capacity truly is.

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