How to Make A Budget In 5 Steps

Budget

A word that strikes fear into the soul of many a consumer.

Take a deep breath and relax. We are going to take a few minutes to talk about this useful tool.

That’s right, I said a tool! Remember folks, the budget doesn’t exist to impose some sort of dictatorship over you, but rather as a TOOL that you use to further your own aims.

A budget, at its most basic, is simply a list of the amount of money going in and out during a set time period. Most people use a month as their basic time frame.

Think of a budget as a plan. Without a plan, we just spend willy nilly. With a plan, we can make thoughtful decisions based on our priorities.

Most people really don’t have any idea of how much money is really coming in and out. They don’t have priorities, they don’t have goals,and they don’t have a plan. This is a problem when you are trying to curb your spending, pay off debt and save money.

We are going to fix that for you in 5 simple steps.

Let’s start with a few things you DO know.

Step 1: How much money is coming in?

Typical income includes categories such as:

Salary
Alimony/Child Support
Social Security
Retirement Income
Disability Payments

Note: If you have any irregular income, try to guestimate-but keep it a very realistic. I personally would underestimate to be on the safe side.

Step 2: How much money is going out in regular, defined payments?

Make a list of the things you have regular non-fluctuating payments for. The most common are:

Mortage/Rent
Taxes
Utilities
Car Payments
Loan Payments
Health Insurance
Car/Vehicle Insurance
Home Owners or Renters Insurance
Alimony/Child Support
Daycare/After School Care
Tithe
Retirement Savings/Investments
College Savings
Cell Phone Plan
Memberships (Gym etc)
Cable
Internet

There, you are done with the easy part. You have found your total regular income and your total expenses from regular payments. At this point you should still have money left over for your variable expenses.

If you don’t you are in serious trouble-we haven’t even talked about gas & groceries yet!*

Let’s assume after your regular payments you have some income left, and move on to the things you DON’T know.

This is the slippery stuff-the expenses that change depending on the month, the situation and your willpower. To make it a bit easier on ourselves, lets break down the process into steps.

First list out every other expense catagory you can think of. Let’s not talk numbers at this point, but just categories. Here are the most typical examples that I thought of:

Groceries
Toiletries/Cleaners & Papergoods
Gas
Vehicle Maintenance
Medical Copays etc
Entertainment
Clothing
Gifts
Office supplies
Classes or Memberships (dance classes, gym memberships)
Charitable Giving
School Supplies
Gardening/Landscaping
Home Maintenance and Repair
Pet Care
Savings
Credit Card Debt

This list will be different for every person, depending on your lifestyle and individual priorities.

Step 4: Assign amounts to your variable expenses.

Once you have your list of variable expenses you can attack it two ways.

Method #1 Write down what you think you spend each month on each of these category. At this point don’t worry about matching up income to expenses, just be realistic about your spending.

Always keeping your priorities in mind cut back on categories until it until your Expenses and Incomes balance out. For example-is one of your goals to bring down credit card debt? Then obviously you don’t want to cut that to the bone-but maybe you can cut the entertainment section and hang at home more.

Method #2 Come at your expenses from the opposite direction. Knowing the total amount of income you have, decide where you will spend it by dividing it up amongst all the categories. Again, do this with your priorities in mind.

The key to this process, regardless of the method you use, is you MUST be realistic. Unrealistic goals will lead to failure.

If you have a family of 5, $30 isn’t likely to make it as a grocery budget. If you work late 3X a week and don’t know how to cook, $0 for takeout is probably a bad initial goal (although it could be something to work towards). . . On the other hand, if you already have a closet full of clothes, then not spending any money on your wardrobe for a few months is very reasonable. . .

This readjustment may continue for a couple of months until you have a firm hold on your finances.

What tools and methods do YOU use to set up and manage your budget? Have an unusual budget situation? Weigh in with your opinion &/or questions in the comments below!