How To Create A Monthly Budget

How To Create A Monthly Budget

Published Thursday, August 22, 2013

If money and numbers make you cringe, you may have chosen to forego a budget until now. And that’s okay. But if it’s time to tighten the purse strings a bit, a budget is a great way to keep track of your spending. Whether you’re making millions like Donald Trump or you’ve been out of work for a few years, having a monthly budget can help you decide how to spend your money, plan for your future, pay off existing debt, and save a few pennies each month by reducing wasteful and impulsive purchases. Follow these 10 easy steps to help create your monthly budget.

1. Gather your financial statements.
This includes bank statements, investment accounts, utility bills, and any information regarding sources of income or expense. This is going to help you have an accurate assessment of money coming in and going out each month. The more information you can dig up, the more realistic your budget will be.

2. Record all your sources of income.
If you receive a regular paycheck with automatically-deducted taxes, then it’s okay to use your net income (or take home pay). If you are self-employed or have outside sources of income, be sure to include these as well. Don’t include any income that is not guaranteed such as tax refunds or work bonuses. This total is your monthly net earnings.

3. Report all your expenses.
Write down all your expected expenses over the course of the month. This can include car payments, mortgage payments, auto insurance, groceries, utilities, entertainment, student loans, child care, and savings. You want to write down every aspect of your spending. Make sure you plan for fun, too! Budgeting doesn’t have to mean total deprivation. This total is your estimated monthly expenses.

4. Break expenses into fixed and variable.
From here, we’re going to break down your expenses into two categories: fixed and variable. Fixed expenses are those that stay relatively the same each month. Your mortgage or rent payment, car payment, cable, and internet expenses are most likely not going to vary month to month. Variable expenses are those that fluctuate. These would include groceries, gas consumption, entertainment, and eating out. These variable expenses are the ones that will be key if you need to make adjustments.

5. Build in debt reduction.
If you have debt, your monthly minimum payments - at the very least - should be included in your monthly expenses. Eventually, you’ll want to put extra money toward these loans in order to pay down the debt. Even if you put an extra $10 toward a loan each month, it helps reduce your principle.

6. Plan for your goals.
Do you have an emergency fund? You never know when your water heater is going to die or your car is going to break down. Are you wanting to take a dream vacation within the next few years? Now is the time to put some money toward it each month to make it a reality. How about retirement? It’s never too early to put money away for the future. Make a list of goals you hope to achieve and plan accordingly.

7. Total your income and expenses.
Take your monthly net earnings and subtract your monthly expenses (including your debt reduction and savings/goal planning money). If you have a positive number (more income than expenses), then you’re off to a great start! This means that some of your excess can go toward retirement savings or paying off credit cards. If you have more expenses than income, then you'll need to make some changes.

8. Adjust your expenses.
If you are in a situation where your expenses are more than your income, then you need to look at your variable expenses to find areas to cut. Beware of luxuries dressed up as necessities. Even though your afternoon grande non-fat peppermint mocha from Starbucks is delightful, it isn’t a necessity. Small cuts really can make a big difference. If necessary, you might need to consider making bigger changes like trading in your gas-guzzling SUV for a better MPG sedan.

9. Review your budget.
It’s important to review your budget on a regular basis to make sure you’re staying on track. After the first month, take some time to evaluate your actual expenses versus your estimates. Your first draft doesn’t have to be set in stone; you may go through 5-10 variations before you find one that works well for you.

10. Stick to it.
Sure, unplanned expenses will come up, but in general, you need to stick to the plan.

If you need or want more help, computer software such as Quicken or Microsoft Money can help keep track of your spending. Likewise, budget calculators and worksheets are available online. Our preferred financial wellness education expert Pete the Planner offers lots of tips for debt reduction and living within your means. Whatever your financial goals, you can achieve them…and a budget is a great place to start.

Credit: About.com Financial Planning

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