How To Create A Budget

By Pinyo, on April 14, 2009

I am down right bad when it comes to budgeting. I’ve gotten used to a save first and automatic payments lifestyle that budgeting has become a foreign language to me. However, a recent unfortunate event may put this lifestyle to an end and force us to take budgeting seriously. I have been refreshing myself on the basics of household budgeting, want to share things I learned with you.

How To Start A Household Budget

If you have never done it before, this is the perfect opportunity to learn together. Here are some basic steps based on a few articles that I read.

1. Track Your Expenses

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.

2. Categorize 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 payment, credit card minimums, car payment, food, etc. before entertainment.

Also, feel free to add some subcategories if you want to be more specific with your budget.

3. Tally Up Your Expenses

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 your savings. This way, you don’t run into a budget crisis when the big yearly bills start rolling in.

4. Add Up Your Income

Do the same with your income. List all of your income sources and write down your average monthly income.

5. Balance Your Budget

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 on 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.

6. Adjust Your Numbers For The Current Month

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.

7. Follow Your Budget

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.

How To Make Budgeting Easier

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.

You Need A Budget (YNAB)

You Need A Budget, or YNAB, is a high quality budgeting software that you can try. The software helps you through each step above and guides you through the budgeting process.

The YNAB software comes in two flavors: YNAB ($24.95) and YNAB Pro ($49.95). It also comes with 60-Day Moneyback Guarantee, so you can try it out and ask for a refund if you don’t like it.

I have been using it for a few weeks now and think it’s working well. Check out the free trial if you’re interested.

Online Money Management Tools

There are online money management tools like Mint.com (review) and Quicken Online (review) that can help you with your budget. Sign up for one of these services (both are free) and link the account to your credit cards and banks. Once it’s all set up, the software will take care of the first 4 steps for you — i.e., list all your expenses, tally up the total, and categorize, etc.

Free Budgeting Spreadsheets

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:

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Pinyo is the brain behind Moolanomy personal finance blog and a few other web sites. If you like this article, please subscribe for free daily email updates.

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12 Comments

Baker
April 14, 2009, 9:50

Great article, Pinyo!

We struggled for a while before we found our budgeting groove. One thing that helped us was using last month’s income to budget! This helped because I had a fairly irregular income, but did require us to get a month ahead in our bills.

I really want to try YNAB to see what it’s like. I’m probably going to give the free trial a test run this week!
ChristianPF
April 14, 2009, 11:09

Pinyo thanks for the mention!
Ken
April 14, 2009, 13:52

I would add to keep track of irregular expenses…for example..we only buy detergent every other month…these oversights can hurt you…..this is from experience. Good post!
craig
April 14, 2009, 15:30

No best way to track and budget, it’s all about what works for you in your situation. I think people think that having a budget means you can’t spend. In fact that incorrect. If you have a hobby, or like buying something. Continue, just know in other areas that you could eliminate or cut back on. Planning out and organizing is very key.
Michelle
April 15, 2009, 9:19

I second the endorsement/recommendation of YNAB…it is both a budgeting AND a lifestyle tool: you spend today’s earned money next month and you accrue in your monthly budget those expenses that are foreseen, but not imminent. I am NOT exaggerating when I say that I had tried 5 different software and nothing seemed to click – but within a month of using YNAB, the light bulb had come on… In the past 9 months of using the software, our family went from living paycheck-to-paycheck with $2500 in credit card debt we just couldn’t seem to pay down to having 2 mos. pay IN THE BANK (the start of our emergency fund), no credit card debt and a PLAN for the future. You see the impact of your day-to-day spending choices, it enhances budget discipline and it enforces planning…It really is that good!
Bill
April 15, 2009, 17:13

One of the best budget creation posts I’ve read!

I especially like the advice in #5 on balancing the budget of having a trusted outsider evaluate your budget if you can’t get it to balance yourself.

#7 is the tricky one though. Don’t forget to pay yourself or you’ll have no incentive to stick to it. By that I mean, if your budget is so tight that you can’t afford one meal a month out with your family, or enough to pay your softball league fee, whatever, then your chance for success is severely diminished.

Call me crazy, but I budget for essentials first (food, transportation, mortgage/rent, insurance) and then I pay myself ($50 every two weeks) and the rest goes toward wiping out debt! Trust me, I’m on a very tight budget but I always pay myself (and my wife!) before the creditors.

Again, great post. Very well done.
Pinyo
April 15, 2009, 21:02

@Baker – Thank you. That’s a good way to do it, but the most challenging part for most people is becoming one month ahead. I’ve been looking at YNAB and this seems to be one of the key step that the software helps you with.

@ChristianPF – No problem…always happy to.

@Ken – Yes, irregular expenses (some call it variable expenses) are the ones you have to be careful with.

@Craig – Right. You can still spend money on whatever. As long as you’re honest about it and budget for it, it’s not a problem.

@Michelle – That’s a strong endorsement of YNAB. Thank you for sharing.

@Bill – Thank you for that big compliment! Great point about including treats for yourself in the budget — incentives are good.
Imee
April 16, 2009, 6:08

I feel lucky that my mom’s always been frugal and that I learned to budget because of her. I’m always scared to end up like a relative of ours who’s buried in debt, so I’ve always tried to be careful with my money but can still be generous when needed.
Chiko777
April 16, 2009, 8:33

I currently use Mint.com and I love the way it bring all my accounts together for a simplified personal fiance examination.
Dorian Wales @ The Personal Financier
April 18, 2009, 8:31

It is important to remember that a budget is not just a tool for tracking expense. A budget is basically a planning tool in which one sets goals one hopes to meet. Measuring performance vs. goals is where the budget really kicks in as a great tool for feedback on our behavior.
Heather
April 21, 2009, 16:44

Great article. Here’s a few thoughts to add:
-Think about your purchases and how they relate to the budget you have set up.
-Establish broad categories and assign an estimate of your expected expenses; this goes along with the adjustments each month.
-The more micro-managed your budget becomes, the harder it is to execute.
-Use broad categories like food, transportation, clothing, housing, and discretionary.
I’ve been using Mint.com for a little over a year now and have found it quite helpful in managing my budget. Quicken has also recently dropped their online fee, so it is also a good alternative to regular spreadsheets and/or pen and paper.
Kerri
November 14, 2009, 13:47

I, too, grew up in a frugal family and managed to budget and understand cash flow from a very early age. Might a recommend a tool, though, as it seems many people lack a basic understanding of what they’re spending vs. what they’re bringing home. DebtSpark (http://www.debtspark.com) provides an alternative to the common spreadsheet. By inputs of income, debt and expenses, users are granted a quick, easy snapshot of their financial health: a simple starting off point on the path to financial improvement, budgeting, and getting out of debt, if needed

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