This article is the first in the series Creating and maintaining a real budget:
We will focus on the first step of creating a budget. The first step in creating any budget is to figure out all past expenses for the last 12 months. Yes, that is right a full 12 months. Analyzing your past expenditures for 12 months will allow you to organize in a way that allows you to create a complete budget, one that can span the next 12 months. Knowing your past expenses will allow us to focus on what we spend, how much we spend and when you spend it in the next steps of creating your budget.
I’ve seen several posts on budgeting and I read things like “you should collect your expenses for the last month”, some might even say “last couple of months”. Neither of which are sufficient. If you want to get serious about budgeting and actually get something useful out of it, you need to look at least 12 months of expenses. Only by looking at a full 12 months will you get all expenses, including the once-a-year type of expenses you could easily miss by looking at just one or even a couple of months. Interestingly, it tends to be these one-time expenses that have the greatest impact on your budget.
Examples of these expenses could be:
- Car insurance: often these are paid in two installments throughout the year.
- We happen to pay flood insurance. It is over $2000 and only occurs once a year.
- Home owner associations fees are often due at the start of the year and can easily run in the hundreds of dollars.
- Private school tuition for one of our kids has just switched from monthly payments to two payments for the year.
- Tax preparation happens only once a year and depending on how you file your tax preparation fees can add up.
- Holidays can have a serious strain on the budget and yet are all concentrated around one month of the year.
- Let’s not forget about summer vacations. They can take up a big chunk of your annual spending.
By looking at only last month or even a couple of month you may very likely overlook some, if not many of these higher expenses. If you want to live by or plan based on your budget you may be in for some unpleasant surprises throughout the year, if you don’t look at all of last 12 month’s expenses.
You might say, well I don’t know what I’ve spent over the last month, let 
alone over the last year, this is not easy. Well, budgeting is not easy. Don’t get me wrong, it certainly is not rocket science. The math is actually fairly simple. The complexity is in the completeness. This takes time and patience.
Not everyone keeps all receipts for every expense you make. If you are an avid frequenter of Starbucks and you pay cash this can be a problem. The good news is that (and I say this with some sarcasm), if it wasn’t paid by cash there will be a trace of it somewhere. There will be electronic records of everything. The question is how to access them.
Let’s start with easy stuff first. Lets look at your monthly bills. If you don’t already, keep your bills for at least 12 months. Some bills that apply to many of us are:
- Utility bills
- Gas/electricity bills
- Water bill
- Cable bill
- Phone bill
- Mortgage/rent statements
- Bank statements
- Home owner association bills
- Insurance bills
- Auto
- Home
- Life
- Dental
- Health
- Flood
- Credit card bills
Except for the credit card bills, most of these should be manageable. There won’t be more than 12 of each and some will occur only once a year (like association fees or in our case flood insurance). For credit cards bills you will have 12 times each credit card and each of them will need to be broken down to each transaction.
Instead of dealing with bills I recommend using software to track your finances.
Quicken deluxe organize your expenses
I’m not trying to plug a specific tool here but I use Quicken and have so for the last 15 years. It tracks and breaks down every expense in all the detail I need to organize my expenses. I realize there is cost associated with many of these software packages but the investment will be well worth it. “Sometimes you gotta spend money to make some”. This may be one of those cases where it is worthwhile.
Quicken allows me to connect to all your accounts like bank, credit card, brokerage and retirement accounts. Through it, I can download the individual transactions for each of these accounts and can do so on a daily basis.
If you are new to the tool, it will download a set of transactions that seems to be dictated by the accounts (not the tool). So some banks you connect to will automatically download the last 6 months of transactions, some account will download more or less.
Most accounts however, when you log into them online, will allow you to specify a date range of data to be downloaded. These manual downloads can then subsequently be imported into quicken.
Once accounts are setup you can update transactions incrementally every time you choose to do an update of your transactions.
Once you have collected all your expenses either by collecting bills or via some software package you have now set yourself up to start organizing these expenses.
Budgeting: Organizing your expenses covers step 2 in creating budget and will be covered in the next article in the series of Creating and maintaining a real budget
Good luck reaching your financial goals.
