Budgeting is no small undertaking. Once you write down your budget, it’s important that you stick to it to reach your financial goals. But where do you start? Introducing: the baseline. This is your own personal spending diary. It is a crucial second step in your financial journey, right behind defining your values.
What is a Baseline?
A baseline is a log for all of your spending that you are going to use to create your budget. Its purpose is to show you what you spend your money on.
Instead of throwing random numbers on a spreadsheet and guessing at your monthly expenses, the baseline is a way to help you learn where you stand, so you can make modifications (a budget) from there.
How To Make a Baseline
Start by making categories for expenses: food, mortgage, vehicles, etc. Make as many categories as you think you need to accurately break up your expenses.
Next, estimate how much you spend monthly on that category. For example, if you think you spend $200 per month on food (groceries, eating out, vending machines, etc.), then write that down.
Now track all of your expenses for the month. Everything you buy should be on your baseline.
The Wake Up Call
Ok, so you’ve tracked all of your expenses for a month. After a stressful few weeks of trying to remember to write everything down, you’ve finally come to the point of reckoning. It’s time to review your spending.
You heard right! I made you track your spending, and now you have to review it. More work!
Before you give up on your financial journey, remember why you’re doing this in the first place. Remember your financial purpose.
This process may seem tedious, but reviewing the baseline is critical in understanding you spending habits. Here’s what you can gain from it:
- You can see which areas you spend the most money, and which areas you spend the least. (Paying more on eating out than your rent? Now you know!)
- You can see trends in your spending. (Noticing an increase in your Starbucks bill as each week goes on? Sounds like you “can’t even” more than you think!)
- You can see all of the ridiculous things you spend money on! (Oh yeah, there will be some shockers on there. Amazon is a dangerous place if you aren’t careful!)
So you have reviewed your spending for the month. Now compare your actual monthly spending to your predicted monthly spending. Did you spend more than you thought and regret it? If you did, then you’re just like 31% of Americans, so don’t feel so bad. In fact, more than 60% of Americans don’t know what they spent last month, so the fact that you now know puts you ahead of almost 2/3 of the American population! Nice job!
What Now?
Now that you know what you are spending money on, it is time to see where you can make changes. Remember, we just created a baseline, which we want to improve on. These changes are going to come from a budget, but let’s not get ahead of ourselves.
Before you start budgeting random amounts into certain categories, it’s important that you first consider the reasons you earn money in the first place. These will give you a financial compass to what you should and shouldn’t be spending your money on. From there, you can take a long look at your baseline and figure out where to start cutting.
After reviewing your spending and your values, now you can combine the two and relate your spending to whether it aligns with those values. This is the next thing I recommend before you create that first budget.
Final Thoughts
Creating a baseline is a critical step on your financial journey. As I mentioned before, most Americans have no idea what they’re spending money on. Writing everything down is a great way to actually see where it’s going.
If taking a month to record expenses seems too tedious for you, then there is a second way to collect your spending. You can collect past bank statements and credit card bills and calculate your spending through those. This isn’t my preferred approach because I think actually writing down all of your spending makes you want to spend less, which kickstarts your frugality glands. It’s the same idea as how dieticians recommend you record what you eat if you want to lose weight.
I remember when my wife and I did this, we learned a lot about where our money was going. We had three older cars on our insurance, one being a sports car. The insurance on the sports car was more than the other two cars combined! Better yet, I wasn’t even driving it in the winter. Definitely something to take a look at.
If you have been following the steps I’ve laid out for the start of your financial journey, then you’re ready to learn how to spend for your ideal lifestyle. If you just got here off a whim, and are ready to start your financial journey, I suggest you start here.
Happy Spending!
-The Spendgineer
I never heard of a baseline strategy. This is really helpful!
This is a great idea. I’ve tried writing down all my expenses and tracking my spending but I can’t seem to follow through. I’ll have to try again
It’s definitely not easy! For me, having a purpose as to why I’m doing everything helps a ton. I definitely recommend you write down your values and keep them close. Every time it gets tough, remind yourself of those values, and it should help you follow through.
For example, if family is close to you, tell yourself you’re doing it for your family. I doubt much can get in the way of that train.
Best of luck!
This is so helpful, thank you! It’s even more important right now with how expensive things are
Definitely! When prices go up, it’s time to hunker down and check spending, because chances are income isn’t also going up. Having that change can be an issue if you don’t have the right plan in place.
Definitely things to consider. Do you give the same advice to post grads?
Great question! I think post grad degrees should be carefully weighed against pros and cons prior to starting. If you are in a field that required post grad, then I would do it no matter what. If you are in a field that may not require it, maybe draw up how it will help/hurt you. There are companies that will pay for post grad work, so keep an eye out for those if you know you really want the degree. Working for those companies while getting your degree allows you to make money and save a ton in the process!
This is how I set up my budget every month! I estimate how much to allocate to each category and try to stay within that.