Budgeting, Week Two: Prioritize Your Monthly Expenses

{Every Monday during the month of January, I'll go Back to Basics and discuss ways to build a realistic household budget. I'd love to hear what works for you! Add your ideas or links in the comment section at the end.}

Budgeting, Week Two: Prioritize Your Monthly Expenses

Last week, I focused on how important it is to track your day-to-day spending before you begin to seriously put pencil to paper and create a budget.

If you haven't already, it's time to grab all those receipts from your envelope for last week. Grab your checkbook or load up your online banking statement, too, just in case you don't have a receipt for everything.

Now sort those receipts out into some system that works for you. Maybe it's "Grocery" and "Gas" and "Eating Out" and "Doctor Visits" and "Entertainment" and "Child Care"...you get where I'm going with this. Create a set of categories and sort those receipts remembering to look at your checkbook register and/or your online banking statements to see if you missed anything.

Once that's done, take a hard look at how much money you spent in each category by tallying up the receipt totals for each. And you also should note just how many receipts you have for each category. Five receipts for the grocery store means you shopped five times that week - was each trip absolutely necessary? Could you have planned a bit and then gone only once or maybe twice?

Look at how many receipts you have for categories like entertainment, eating out, clothing. Many? Few? If you find yourself with a stack of receipts for meals on the go or lunches out, ask yourself if you could cut back a little and bring lunch instead. If you're grabbing food on the go for yourself and your kids, could you maybe buy portable food containers and pack food for those busy nights instead?

Ask yourself these questions as you go through last week's receipts:

What can I do differently, what can I do less of, and what can I do without?

The key to building a budget that will stick and work for you for the long term is taking this long, hard look at your spending and finding ways to decrease it. How much you decrease your spending in each category and which things you decide you can just flat out do without (ie: Starbucks) is up to you; but if you intend to save money, cutting back on your discretionary spending is the best place to start.

This can be hard; it can be painful. But if you really want to do better financially in 2009, you have to ask yourself these tough questions, and ask your spouse, and sometimes even explain the new financial reality to your older children.

The next portion of building your budget is a little easier and a little more straightforward: bills.

We all have fixed expenses and slightly variable expenses each month for items such as housing, insurance, utilities, loan payments, child care, alimony or child support, just to name a few. Gather all your monthly bills and start compiling a list of all of your fixed monthly expenses that *must* be paid every month.

Under that list, make a list of your variable expenses, those items that you pay less frequently, such as vehicle registration, doctor visits, club or association dues, children's activities. Some of these items are only paid once a year or only three to four times a year. You still need to know how much is going out of your checking account for them and you still need to forecast for those upcoming variable expenses.

This list bears scrutinizing, too; are you subscribing to magazines you never read? Drop 'em and pay yourself that money instead. Are your kids participating in two or three activities each? Drop one or two and regain a little green in your pocket and a little sanity in your life.

What I'm suggesting you do, dear frugal friends, is simply this:

Scrutinize every penny you spend, both on day-to-day things and on a monthly or longer schedule and cut back where you can.

None of this is easy to do; it can feel like you're giving up all the little comforts and extras you work so hard to enjoy.

But do you really, truly enjoy them? If you're worried about money and your financial health and the potential for dire financial circumstances, do you truly enjoy all those little "extras" you spend your dollars buying?

If not, take your pencil and cross it off the list. You've got something better to spend your money on: your financial future.

Next week, I'll talk about building a working budget. I'll also make available a public Google Doc budget spreadsheet that I've been using to keep our monthly budget on track.