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How to Create A Budget

By Edited May 24, 2016 0 0

Creating a budget doesn't have to be difficult.

Just follow these easy steps.

These days, even entire countries are talking about the importance of making and sticking to a budget. Many households are probably in a similar situation – there’s too much month at the end of the money. It might feel like there’s no way you can ever get on top of your finances, but there are definitely things you can do to get on the right track.

 

How to Get Started 

First, you need to sit down and write down all of the things you spend money on. You might think you know where the money goes, but trust me, do this anyway. It can be very eye-opening.

The big items are easy – rent, utilities, car payment, phones. If you have a checking account, or even if you don’t, you can do this. Go back through the last three months and note down all the payments, then get an average of each three-month time period for each expense. Group these into categories – Shelter, Food, Car, Insurance, etc. These are called “non-discretionary items”, meaning you don’t have much control over how much you spend on them.

 

“Discretionary” Spending

Most of the remainder of your money, the “discretionary items”, probably goes into a big black hole called “Miscellaneous.” This is where you actually have to do some work. Get a notebook, and write down every penny that you spend for a week, if that week is fairly typical for you. This might be cash spending, or debit card, or credit card; it doesn’t matter. If it’s not one of the big fixed expenditures, write it down. Longer than a week is better, but it can be really annoying to write down every little thing for very long.       

Then take the week’s worth of spending, and group it into categories that make sense for you. This might be Groceries, Fast Food, Gas, etc. Note especially any regular items that you do frequently, like buying a newspaper or playing the lottery every day.

 

Income vs. Outgo

By now you should have a pretty good idea of where your money is going. Now map that against your income. Hopefully, the income will be greater than the outflow, even if only by a little bit.

So next you make up the budget.  Make it realistic – if it costs $800 in rent and another $200 in utilities, put $1000 for Shelter; don’t try to fudge it and think that somehow you will make it work.  The budget will be absolutely meaningless if you are not realistic.  Set aside appropriate amounts of money for all the non-discretionary items first, and then allocate the remainder to the discretionary items.

           

Envelopes Full of Money

I’m actually a fan of the envelope system, and by that I literally mean “envelopes”. When you get your paycheck, set aside enough for the non-discretionary items, and split the discretionary money, in cash, up among several envelopes – one for Fast Food, one for Groceries, one for Gas, one for Fun, etc.  Then when the envelope is empty, you’ve used up that category for the month. You may find yourself shuffling among the envelopes a bit, which is OK, as long as you don’t dip into the non-discretionary money.

 

Too Much Month…     

If you find that there is not enough money for everything, then this is where the compromises come into the picture. The first thing to look at is your discretionary spending. Are there any that made you sit up and go, “oh wow!” Like maybe your $100 a month Starbucks latte habit, or $50 a week in Fast Food instead of Groceries. That’s where you cut first. However, it is not good to go all monk-like on the budget and eliminate every last bit of fun from your life. That tends to backfire in a big way, so be sure to leave a little for frivolity.     

Once you’ve been through the discretionary items and eliminated as much as you can, then it’s time to look for larger things to cut. Can you reduce your cable bill by dropping HBO? Can you find a cheaper cell phone plan? Can you increase your deductible to get a lower premium on your auto insurance?

If you find your income is far less than your outflow, then you have to make more serious decisions. You will have to a) boost your income, b) cut your expenses dramatically, or c) both. All of which will be covered in a later discussion.

 

One Small Step for Man…

Budgeting is only the first step of many on the road to financial stability, but it lays the foundation for you to move forward. It’s important to know where you are spending your money, so that you can make informed decisions about where to make changes.

 

 

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