How do you create a budget? It is helpful to review your spending, reconcile your bank statement, and define your financial goals before you create a budget.
Ideally, you do this each month and create a budget for the month ahead. Doing it monthly gives you an opportunity to ensure you are capturing all of the expenses for the next month. Some months might be more expensive than other months.
It sounds like a lot of work but it gets easier the more you do it. The first month or two of creating a budget might really suck but once you have a system down you will fly right through it in no time and be a budget-creating genius.
Why create a budget?
A budget is your plan for all the ins and outs of your money. Sounds pretty straightforward, right? It is!!
I know, everyone has a different financial situation with different financial obligations and very different numbers both coming in and going out. But….that does not change how to create a budget. It only changes the numbers that you put into it.
Options to create a budget
There are quite a few different methods of budgeting that you can use. There are zero-based, pay yourself first, 50/30/20 budgeting methods, and many others.
For this post, I will describe a fairly simple way of creating a monthly budget. It is nothing fancy but gets the work done. You can do this on paper or on a spreadsheet.
If you are more into using online resources there are a few options available such as Mint, You Need a Budget, and Every Dollar.
Create a budget in 7 steps
1. Determine your take-home income
Determine what your take-home income for the month will be. If you are paid an irregular income then give your best estimate and then reduce that number by 10%. I use 10% as wiggle room just in case the estimate is incorrect. If your income happens to be more then put the difference in your savings account.
For example, if you estimate that you will be paid $4000 in the month then note $3600 on your budget. Anything above $3600 you can save or use to reduce your debt.
2. List your required expenses
Next list all your required expenses. These are the standard expenses that you pay each month that you pretty much have to pay.
Some of your expenses will be a fixed number such as rent/mortgage, loan payments, and insurance. Others will vary like food, gas, utilities, and household items.
For the expenses that vary think about what you plan to spend for these items. If you have been budgeting for a while you can take an average of what you spend. If you have not been budgeting then look over your checkbook register and past bank statements to get an idea of what is typical for you.
3. List common expenses
Now list the expenses that are common but that you can do without if you need to. Dining out, entertainment, online shopping sprees, spa services, etc. List what you plan to spend based on your history.
4. Gather all your irregular expenses
One reason why I suggest to budget monthly is that it is a good time to be sure you are not forgetting about some of your irregular expenses. Common irregular expenses are property taxes, income taxes, car service, and school tuition. You can also lump holidays and vacations into this category.
For anything that is due in the month be sure to add to your budget. I also suggest looking at what is due in the next 2-3 months and putting 20-30% of that amount into the current month’s budget.
For example, if you know you have car service due in three months and it is generally $450 then I would budget $150 to the current month’s budget (as well as the next two budgets) Put it in your savings account so you are prepared in 3 months. $150 per month is a lot easier than $450 at one time.
5. Money for financial goals
If you are working toward paying down debt then note how much money you will put toward your debt payoff this month.
If you are increasing your savings or investments then note how much you will be adding this month.
Whatever your financial goals are be sure to add your contribution amount to your monthly budget.
6. Calculate
Now it is time to calculate it.
Use your income as a starting point. (do not use your current bank balance) and subtract all of your expenses.
7. Evaluate
Do you have money left over? If you have more income than expenses then go back into your budget and see if you can add more to your financial goals section. Maybe you can pay more toward your debt or you can save more.
Do your expenses exceed your income? In this case, you are spending more than you earn and it is time to go back through your expenses and adjust. What areas can you spend less in?
When you make these adjustments I recommend keeping your financial goals in mind. For example, if you choose to contribute less toward your debt payoff and leave your entertainment and dining out categories alone then ask yourself if the debt payoff is really important to you. Be honest with yourself when making these choices.
Keep massaging your numbers until you have a budget that does not have a very big balance at the end. Some say that the bottom line should be zero. If that makes you nervous keep a little cushion but close to zero is a good place to be. Remember, this is not your bank account. If after you subtract your expenses from your income your number is positive then move that number toward your financial goals.
Summary
Review your budget regularly and adjust it as necessary. We do not have crystal balls so we cannot predict everything but we can definitely do our best to be prepared.
Remember to always add a savings portion to your budget. Not only does this bump up your savings but it also acts as a buffer in case you miss an expense or an unexpected expense comes up.
Have fun creating your monthly budget. If you need help or have comments, please reach out to me. I am happy to help.
Thanks for reading!
Stay balanced,
Jill