How to Create a Budget – Evaluate Expenses

by Khaleef Crumbley on September 16, 2010

in Budgeting,Personal Finance

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I’ve written in the past about the various steps to setting up a budget. First we looked at the reasons why you need a budget, and we realized that there are a lot of reasons to have a budget and that everyone should create one.

We then looked at keeping track of your income (even if it’s not steady), and various ways to track your expenses.

We also talked about setting financial goals when creating a budget. There is no real point in tracking all of your income and expenses if you are not trying to obtain a goal!

So, now you’ve read these articles, you have your budget in place, you’ve been tracking your income and expenses, and you even took the time to set goals.

…Now what?

Well, now you must evaluate your income and expenses and see how that fits in with your goals (see how all those articles just fit right together? 😀 ).

For instance, if you find that you are saving a lot of your money for your son’s college tuition, but your #1 financial goal was to get out of debt, you need to adjust your budget.

Where should I start?

We identified several goals that could motivate you to set a budget. Let’s take a look at them and see how you should evaluate/tweak your spending in light of each:

Get out of debt

If you are trying to get out of debt, this is where all of your discretionary (meaning you can spend it any way you wish) income should go! Let me back up a bit. First you should build a $500 cushion in your checking account. Next, put a month worth of living expenses in a high-yield savings account. Now you are ready to throw every spare dime at debt repayment!

Since we understand that debt is equivalent to slavery (Proverbs 22:7), it is imperative that we get out quickly! That means we have to become desperate. What I mean by this is that you should be willing to cut unnecessary expenses in order to make this happen. Evaluate your expenses to see if there are any areas that you can cut.

If your goal is to get out of debt, then your budget should not be full of luxuries that you can do without! If you have to ditch cable TV for a year, do it! Your expenses MUST line up with your priorities.

Build an emergency fund

As stated above, I believe there should be two stages to building your emergency fund (EF) – if you are in debt. If you are out of debt and ready to build your EF past the 1 month minimum, then make sure your budget reflects that. Because establishing and building an emergency fund is such a foundational step, I believe that a sense of urgency and slight desperation is needed here as well.

There are two main reasons why this step calls for strong measures. First, if something unexpected happens (large medical expense, loss of income, expensive maintenance on your car or home, etc), you want to be able to handle it without going back into debt!

Secondly, you want to quickly get to a point where you can put your money to work for you! Kevin from Invest It Wisely recently conducted an analysis of whether it is better to put a lump sum of money in an emergency fund or to pay off debt (particularly, a mortgage). The reason for this analysis is because there is an opportunity cost to having all of your money sitting in a savings account.

In simple English this means that money sitting in savings cannot be put to use in other areas.

So, if you want to invest your money, or save up for retirement, or even put money aside to buy a car, you need to get past the EF stage – since it’s the foundation to healthy finances!

The bottom line here is that you should sacrifice to build up this account as quickly as possible, so you can get to the fun stuff below.

Put money aside for retirement

Unless you think that Social Security will be able to provide for 100% of your expenses in retirement, your budget better leave room for this expense.

While money put aside for debt repayment and building an emergency fund will be temporary, retirement savings tends to be permanent (at least until you retire). This means that it will take more than temporary sacrifices in order to comfortably work this item into your budget.

One of the great benefits of retirement savings is that most employers will allow you to participate in a 401k plan, so you can have your contributions taken directly from your paycheck.

What many people do in this situation is have the desired amount deducted and budget with the rest! This takes a lot less discipline than receiving your full paycheck and having to deposit the money into another account. You can also set up automatic transfers directly into your Individual Retirement Arrangement (IRA) for the same effect.

Identify areas for giving

I believe that giving should hold a supreme place in your budget. Because of this, it should be included in mandatory spending just like retirement savings or debt management!

If you feel strongly about giving, then you again must be willing to adjust your budget to reflect this. Once you begin to evaluate your expenses and see where your money really goes, then it will become much easier to make these seemingly tough decisions!

If you rate television low on your list of priorities, but you spend a few hundred dollars a month on cable/satellite, a DVR, Netflix, and DVD/Blue-Ray purchases, there’s a big problem!

Cut back on your cable/movie expenses and start giving from the savings!

Save for a large expense

If you ask many people to list their financial goals, they will mention “saving to buy a house/car/boat/etc”. However, one look at their monthly expenses will usually tell a different story!

It is always a good idea to set a time on these types of goals. That way you will know exactly how much you need to save out of each paycheck in order to make it happen.

If you just save any arbitrary amount each month, you may never reach your goal!

Again, evaluate your expenses and see how you can arrange your spending in order to meet your goal.

Here’s a quick example:

Say you have your sights set on a $300,000 house, and you want to put 20% down…You will need to save $1,000 per month for the next 5 years!

Bring that up to a $500,000 house, and your looking at saving almost $1,700 per month! [note: this does not take into account any interest that you may earn]

The point is, these dollars aren’t going to just jump into your savings account! You will have to plan and possibly cut in order to reach your goals – which is why evaluating your expenses is so important!

Save for a child’s education

I listed this last for a reason. Saving for a child’s tuition should not be more important than any of the items on this list. However, if these things are taken care of, then I see no problem with putting money aside for college.

This is something that can easily slip through the cracks. That’s why it is so important to “set it and forget it” (ok, too many infomercials)!

But seriously, setting up automatic payments while you are still changing diapers will make all the difference 18 years later!

There is nothing new here, evaluate your expenses to see if you are making this a priority in your spending!

Notice a common theme?

Each one of these items need one major thing… Discipline! Each one of these goals calls for you to focus your spending to a few categories and save the rest!

Using automatic transfers and online billpay services, can help to ease this process and give you a “forced discipline” with your finances.

Here are a few questions for you to answer in the comments:

  1. Are you striving for any of these goals?
  2. Will an evaluation of your expenses tell a different story?
  3. Have you had to make changes in your initial budget?
  4. How are you able to focus your efforts?

photo credit: Brooks Elliott

© 2010 – 2013, Khaleef Crumbley. All rights reserved.

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{ 12 comments… read them below or add one }

1 Credit Card Loan

Evaluating your income and expenses is a good idea and it helps you a lot to budget you income once you get it where it will fit. This article is a big help for everyone.


2 ditchtheboss

Thank you for posting this article on my weekly financial independence compilation.

Hope to see another one in my next edition.


3 Glass Is Half

Goal setting is key. Not only in budgeting but in life in general. Once you know what you want to achieve you can then break it down into small chunks that are easily reachable and budgeting is a perfect example of that as it forces you to utilize a calendar.


4 Khaleef Crumbley

That is very true. Assessing the full picture so you can break it into achievable tasks is very important in every area of life.

Thanks for stopping by!


5 youngandthrifty

So thorough, Khaleef!

Sounds like a good plan of attack. Good to always break down the numbers to see actual affordability.


6 Khaleef Crumbley

Thanks! I think it’s so important to do regular “audits” to make sure you are spending/saving according to your goals!


7 Everyday Tips

I wish everyone in America would read your blog and adhere to your advice. Unfortunately, I think many have their priorities completely in reverse. (Spend first, save later.)

I am not a big spender, so I don’t worry much about my spending habits, day-to-day. But if I had to make a to do list to reduce my monthly spending, this is what it would be:
1. Dump HBO
2. Call insurance company and raise deductible on cars
3. Get rid of landline (Not sure I want to do this yet though)

I think I will do this next week!


8 Khaleef Crumbley

Thanks! I was one of those spend first, save later people, and I’m still paying for those bad choices!

You have a great list – we still have our landline for 911 access only.


9 Roshawn @ Watson Inc

I like how you have giving on your list. So many people don’t allocate funds for this, but you are in that it is about priorities. Get rid of Skinamax, and you will have a few dollars to give away.


10 Khaleef Crumbley

I agree, there are so many things that we will admit are not priorities, but they take up a lot of our bank account each month!

You have me laughing right now with your “Skinamax” comment!


11 Kevin@InvestItWisely

I probably would have avoided most controversy if I had called it “put lump sum in chequing or pay down debt”, but it would not have been as interesting. 😉

I agree with you that when starting out with mostly debts and no assets, then paying down debt should be the priority, as well as building up a contingency fund. Once the contingency fund has reached a comfortable level and the worst debts have been paid off, focus can then shift toward giving and investing for the future.

I would also add that increasing the spread between income and expenses allows one to accelerate savings, the paying down of debt, and also creates a larger buffer zone that can accomodate shocks such as unexpected expenses or loss of income.

Thanks for including my article!


12 Khaleef Crumbley

Yeah, I like your title better! Your right, decreasing expenses and/or increasing income is the best way to be prepared for an emergency!


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