Budgeting 101: How to Create a Budget
By: Aly Hess
Posted on Monday, April 14, 2014
You may occasionally drop the phrase, “That doesn't fit my budget,” or hear family, friends, or strangers claim, “I’m really sticking to my budget this year!” But answer me this: How often do we actually have a budget – one that’s mapped out, detailed, and truly top of mind – to be referencing?
Many of us have a pretty good feel, in general, for our spending habits. We know about how much we spend, how often, and on what, and we likely know about how much will be left in our accounts at the end of each month. In addition, we might get a gut feeling when we’re spending too much here or there or our accounts have dipped below that “comfortable” level. But that’s not budgeting. Having a solid, detailed budget allows us to have more control over our money and our financial goals. It also helps us see exactly where all of our income is going and acts as a tool to help us save more of it. If you haven’t created a personal budget, or one for your household, doing so will most certainly put you more at ease with your finances.
How To Create a Budget
Let’s start by defining the very word itself. A budget is "[an] estimate of income and expenditure for a set period of time." Or, in simpler terms, knowing how much money you have coming in in a given period of time (week, month, year) and how much of that you're spending in the same period of time. In the end, you want your income to be higher than your expenditure.
Round Up All Financial Statements
Gather your bank statements, monthly bills (rent, utilities, insurance, pay stubs) and any other information that relates to your finances – for both incoming funds and expenditures. You can create a weekly, monthly, or yearly budget – that’s up to you. These tips speak to creating a monthly budget.
Record All Sources of Income
Select a method you prefer for keeping track of your budget. A notebook, Word document, Excel spreadsheet – whatever works for you. Then, calculate how much money you make (income) in a given month and write it down in an "Income" column or page. Include your main source of income, as well as any money made by supplementing your income through other means (selling regularly through eBay, crafting DIY projects, donating plasma, and so on.)
Record All Monthly Expenses
Next, record every single expense you encounter in a given month and include these in an "Expenses" column. Include rent or mortgage payments, car payments, insurance, grocery costs, utility bills, entertainment, eating out expenses, student loan payments, and even typical amounts spend on toiletries, clothing, and other personal items. It can be a little tricky determining how much you spend on the smaller items month to month. Try Shoebox Budgeting to help you get a better handle on those costs.
Total Monthly Income + Monthly Expenses
Now it’s time to do the real math. Hopefully when you add it all up, you have more income than expenditure. But as life will sometimes have it, from time to time we'll have more outgoing than incoming. Creating a budget can benefit those on both side of the fence!
Label Expenses as "Fixed" or "Variable"
Fixed expenses tend to stay about the same each month: rent, insurance, student loan payments, Internet service, and so on. Unless you select different payment options or investigate more affordable options, you can expect these costs to stay the same month after month. Variable expenses can vary greatly month to month. The cost of groceries, fuel, gifts (some months have lots of birthdays or holidays compared to the rest) and more can prove a little less steady than fixed expenses.
Make Adjustments to Expenses
Trying to get your “Income” column and “Expense” column about equal is what you should be going for here - if not getting “Income” much higher than “Expenses.”
- Try first to start making adjustments to the variable expenses. This might mean you have to start eating out less, cutting back on shoe-shopping sprees, and looking into saving on gas by walking, biking, taking public transportation, or carpooling when possible. Shop for pricier items at secondhand stores and make time to clip coupons before heading the grocery.
- If you're still really struggling, research your options for lowering your fixed expenses. A smaller apartment with lower rent might be worth an extra $200 saved per month. Struggling to pay your student loans? Investigate another repayment option or deferment. Try living without cable and look into a cheaper Internet provider. Cut where you can.
And there it is! You've created your budget. Now, you can easily see where you need to cut down on spending, take note of spending patterns, and determine how much you can reasonably spend on extras month to month as well as how long it will take you to save up a certain amount of money for bigger expenses – like putting a down-payment on your first home, paying for your wedding, or having enough set aside for unexpected medical costs.
For more information on creating a budget, check out this article.