Creating a Budget

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How To Create A Simple Budget (and Stick to it)

“Budget” is perhaps the scariest word in the English language: Few things strike fear in the hearts of average Americans like the thought of sitting down and – gasp! – writing a monthly budget. Maybe it’s denial: Do you really want to be held accountable for the $50 in gossip magazines you read every month? Will a budget mean that you have to give up your morning Starbucks routine?

Don’t worry. Budgeting isn’t really all that scary. With a little planning, you can set a budget that works for you. You can stick to it. And, if you’ve really done it right, you can keep your morning cup of coffee, too.

Step One: Your Monthly Income

Start by adding up your household income for the month, including your pay, your spouse or partner’s pay, and any other sources of income you may have, like alimony or child support. If you work at a job with irregular pay (like bonuses or commissions), figure out what you make on average. Once you know exactly what you make in a month, it’s time to see where that money goes.

Step Two: Your Monthly Expenses

The key to writing a budget is to understand exactly how you are spending your money each month. Most of your expenses probably fall into two basic categories:

• Fixed Expenses: These expenses stay pretty much the same every month. Fixed expenses include things like rent or mortgage payments, homeowner’s fees, electricity bills, car payments, and insurance, to name a few.
• Variable Expenses: These expenses are much harder to plan for because they can change from month to month. Gas, food, clothing, and entertainment are all typical variable expenses.

First, gather all of your monthly bills and add them up. Those are your fixed expenses for a typical month. After that, you’ll need to figure out where the rest of your money is going.

Next, keep track of your variable expenses in a month. Save your receipts for every purchase, no matter how small – if you’re on the road a lot, consider keeping a manila envelope in your car at all times for gas, food, or parking receipts. At the end of the month, divide and add up all of your receipts by category:

• Food. Include receipts from the grocery store, restaurant and drive thru meals, coffee, and snacks. If you eat or drink it, add it up.
• Transportation: Gas, parking, toll roads, or public transportation. If it helps you get from point “A” to point “B”, put it in the stack.
• Miscellaneous: Add up all the money you spent on “extras” during the month. This could include clothing, impulse purchases, entertainment, or gifts. And don’t forget about emergency funds, like replacing a flat tire.

Step Three: Writing Your Budget

Now that you know how you’re managing (or not managing) your funds, you can start writing a budget that you can stick to. It’s easier than you think. Here’s what to do:

• Deduct all of your fixed expenses from your monthly income. This is the amount you’ll need per month to pay the bills.
• Deduct each of your variable expenses from your monthly income. This should tell you how much, on average, you’ll need to pay for food, transportation, and other expenses. Disappointed with the amount you’ve got left over? Try budgeting less for things that you think you can live without. For example, if you spent $100 on restaurant meals last month, try whittling that amount down to $50 – you’ll have more money to play with.
• Decide on an amount you can put into savings. Use some of your after-expenses money to fund your starving savings account. If you don’t have a savings account, get one. Pick an amount that you think you can live without, whether it’s $25 or $100. Make saving even easier by setting up an automatic transfer from your checking account.
• Allow yourself a little “fun money.” A budget is a lot easier to stick to if you let yourself have a few little luxuries here and there. After your bills are paid and you’ve put a little in savings, treat yourself to something that’s not essential, like fancy gourmet coffee or a magazine here and there. The important thing is to set an amount and stick to it: Once it’s gone, it’s gone.

Step Four: Sticking to it

So, you have a budget. That wasn’t so scary, was it? Now that you have a plan to cover your expenses, save money, and give yourself a few fun extras, you should be on the road to financial security. To make sure your budget works for you, try living on it for one month. Did you have a little extra in the bank, or were you scrimping to cover your expenses?

Allow yourself the chance to reassess your finances at the end of a month; if you had a hard time, try moving things around a little. After a few minor adjustments (like taking money from “entertainment” and moving it to “transportation”), you’ll have a budget that you can truly live on (and with).

Copyright 2005-2012 Mike Peterson