Creating a budget is one of the easiest ways to make sure you are not spending more than your household income, but it is something that not enough families and individuals take the time to complete. This shouldn’t be the case, as budgets are very simple and can end up saving you a lot of money and help build wealth if followed properly.
How To Create a Budget
1. The very first step that you need to do when you sit down and make a budget is to organize all of your financial documents. This ensures you know how much monthly income you have from your job, investments and any other revenue sources you might have. Since my wife and I are both self-employed, this is a little more difficult because we do not have a constant income. What I prefer to do with our budget is to base our budget off of our average monthly income over a six month period.
2. Secondly, go through and write down all of your expenses. Start with all of your fixed expenses which typically include your rent or mortgage, heat, electricity, cable and any other bills that you have each month. Once you’ve done that, you will want to figure out all of the dispensable expenses that you have had over the past few months. This also includes anything that you might have charge on your credit cards. Dispensable expenses often include items such as gas, food, travel and other non-essential items.
3. Next you need to take your monthly expenses and subtract them from your total income. Five or ten years ago it might have been necessary to use a paper and pen or an excel document, however, now you can download apps. One in particular is Mint.com, an app in which you enter all of your information and it will present your monthly cash flow results. You may find yourself with a positive number, which means you are doing well. Or, on the other hand, you can have a negative number. Results with a negative number are a key sign that you need to take a step back and analyze your discretionary expenses to see where you can cut back.
So now that you have a budget set for yourself and you know where your money is going each month, you need to focus on sticking to it. If you don’t than it will not be of much use to you. Keep in mind that your budget can change at any time, from a raise at work to getting laid off or gas and food prices skyrocketing. All of these things can force you to reanalyze your budget. If you have extra money each month make sure you are adding it to a savings account such as ING Direct, or to your Roth IRA.
Do you have a budget in place for your family?
I also calculate how much savings I want to take out of each paycheck so that I can include that in the budget – this includes savings for my travel fund, down payment fund and also my roth IRA. I did that after checking my monthly fixed expenses, just because I knew that I wanted to pay myself first. When that was taken care of, the hardest part was tracking my money – it’s something you HAVE to do daily when you are first budgeting. You can play with your figures and see where you can cut money and how you can make categories in your budget.
I need to get around to trying Mint and their budgeting tools. I’ve never taken the time to really analyze my spending and set a budget. I’m sure it would help a lot though. It’s bound to reveal some areas where you are overspending. Once you set a budget it is also important to think about how you can save money on various expenses. Then you can set budgeting goals to try to reclaim more of your money.
I have a budget in place for myself, but I use an old fashioned spreadsheet. I have a hard time with Mint – it seems there’s a lot of background noise. I find when I watch shows like ‘Til Debt Do Us Part, many people have never tracked their spending. Can you imagine? I think that’s where it all has to start.
We definitely have a budget but I must be one of those dinosaurs that use excel to do it. Everybody talks about Mint but I just haven’t wanted to break from what I know works.