A budget is a plan to help you balance your income against your expenses. Depending on your situation, you might budget to break even and stay out of debt, but if your cash flow allows it, your budget should allow you to also save some money each month. Creating a budget that works is not difficult, however, it does take discipline to stay on top of your budget and stick to it. If you have never done it before, here are some basic steps to help you start a budget.
The first step is to gather your receipts, bills, credit card statements, and checkbook from the last few months in one place. Go through them and make a list of your expenses.
Next group your expenses into a few general categories. For example: home, car, food, household, debt, clothes, entertainment, charity, and savings — don’t forget savings! You should also list the most important “must pay” categories first — e.g., mortgage, credit card, car loan, food, etc. — before entertainment.
Also, feel free to add some subcategories if you want to be more specific with your budget.
Now add up your expenses and calculate average monthly expenditure for each category. Round up to the nearest ten dollars so that you have some wiggle room.
Also, it’s important that you don’t forget your quarterly and yearly expenses. It’s a good idea to break these expenses down into monthly amounts and put them in a separate savings account. This way, you don’t run into a budget crisis when the big yearly bills start rolling in.
Do the same with your income. List all of your income sources and write down your average monthly income.
Do you have more expenses than income? This is the time to go through your expenses and see which can be reduced or eliminated. Be creative and remember that every little bit helps. Here a tip to help you:
Look at expenses that occurs daily, weekly, or monthly first. If you can cut or reduce these expenses, you enjoy the savings again and again. For example, utilities, cell phone, television, subscriptions, memberships, transportation, food, etc.
If you still can’t balance your budget even after you tried to cut down your expenses, you many want to ask someone you trust to give it an objective look. Another person may see things differently and be able to point you in the right direction. For example, I know someone who lives paycheck to paycheck, but thinks premium HD cable is essential.
If that’s still not enough, it’s time to take drastic measure — i.e., sell your car, move to a less expensive apartment, give up bad habits, etc. Another option is to figure out various ways to increase your income.
Now that you have the basics all set up, you have to make a budget plan for the current (or the next month). Go through your income and expenses again to make sure that it reflects your current (or next month) financial picture.
This is probably the hardest part. Now that you have your budget made, make sure you follow the plan. Don’t spend more than you budgeted. If you have unspent money in a category, carry it over to the next month as income instead of spending it this month.
Budgeting takes a lot of discipline and it could be quite overwhelming the first time around. However, there are several budgeting software and tools to make your life easier.
There are also free spreadsheets that can help you get started quickly and works well as a checklist to make sure you don’t forget any expenses. Here are two that I recommend:
Reviewed and updated April 17, 2011.