Ask story's money: Budgeting for variable expenses

My first question for Ask Story's Money comes from my good friend Elizabeth who blogs at She Likes Stripes:

I definitely still need help with budgeting, like how do you know what your monthly gas budget is? or groceries? Coming as someone who has no budget set right now (and I suppose that's probably also due to the fact that i'm coming off of 4 years of living alone) ... how do you set those numbers when you're pretty sure you already spend too much? ... Or how do you allow yourself little treats (like new shoes here and there, things for fun) amid trying to be super frugal because you know you have big things to save up for?

The first step to budgeting for variable expenses like this is to know how much you already spend. There are various software and online solutions for this, but for me the easiest way is just to sit down with your credit card or bank statements and start adding. Depending on how much time and patience you have, you can do one month or do three months and average them.

Odds are, the first time you do this exercise, you will be a little horrified. Most people have no idea where their money is going.

So how do you figure out how much you "should" be spending?

1. You can look at the national averages or recommended percentages for grocery budgets. Unfortunately I think this is probably the least useful
way to do this because there are so many variables at play.

2. You can figure out how much you can actually afford to spend. This requires you to really sit down and make a full household budget, listing all your regular expenses and your income. If you are currently spending more than you can actually afford to in a sustainable way, this is crucial.

3. You can set incremental goals. For the most part, I think this is where most people should be. Try to gradually reduce your grocery spending a little bit every month until it reaches a point at which you feel more comfortable.

How to actually reduce this? Is a much bigger question and one for another day.

Have a question? Leave it in the comments or send me an email.