How Do I Create a Budget?

Everybody has different financial goals. While some are saving for a special purchase, others may be focused on saving for retirement, or working to get out of debt. If you have a specific savings plan in place, your chance of meeting your goals increase. Put your goals and savings plan together, and you essentially have a budget.

The best advice for creating a budget is to start simply. Once you learn more about the process of budgeting, you can add refinements. Here are some of the fundamental steps involved in budgeting:

Select a record-keeping method that works for you: There is excellent budgeting software out there--some programs are available online for free. If you are more of a paper-and-pencil type, that's fine too. You can even start with something as simple as keeping money for different purposes in different jars. The point is to figure out a system that suits you and that you'll stick to

  1. Identify your true income: Your true income is recurring income you can count on. For most people, this is their annual take-home pay. Extraordinary items such as gifts or bonuses can be used to add to savings, help you get out of debt, or even to splurge on a one-time purchase. Since you can't count on them year after year, gifts and bonuses should not be considered part of your income for budgeting purposes
  2. List your expenses: This is more complicated than it seems, so don't try to do it off the top of your head. Start with the big-ticket items, such as your rent or mortgage, car payment, etc. Then work your way down to smaller monthly bills like cable and utilities. Use your bank and credit card statements as a reference--you might be surprised at how many things you are paying for each month. Finally, estimate how much you are spending out of pocket--these are the cash purchases for lunches, coffees, or newspapers that you might not realize you are making
  3. Quantify other financial needs and goals: Your monthly costs are not your only expenses. You will also have long-term needs like saving for retirement, and other financial goals like buying a car or a house. Figure out how much you need to save each year toward these long-term expenses, because they will have to be part of your budget as well. If you need to get out of debt, then paying down existing debts should also be part of your budget
  4. Compute the surplus/deficit: Now comes the moment of truth. Subtract your short and long-term expenses from your true income. This will tell you how much of an annual surplus or deficit you are running. Since the point of budgeting is to live within your income, a deficit means you will have to make some adjustments. However, even if you show a surplus, you still have additional work to do
  5. Adjust and monitor: If you are running a deficit, take a fresh look at your expenses and figure out what you can cut to get them to fit within your budget. If it looks like you will have a surplus, you need to budget specifically for that surplus. It can be something as responsible as adding it to your savings account or it can be a frivolous purchase. The important thing is to account for how you will use that surplus, so you don't end up spending it several times over. Then, as you go through the year, monitor how your budget is going, and make any further adjustments that become necessary as new information emerges
  6. Do something constructive with savings: Shop for a competitive savings account, and if possible, use an automatic savings plan like payroll deduction to make sure the money you're budgeted to save makes it to your savings account.

What you realize once you begin creating a budget is that it is difficult to plan for just one year. Certain goals spread out over multiple years, so ultimately your budget should grow to be a multi-year plan. However, start with the basics. If you begin by planning for the year ahead--and then stick to and track that budget as the year goes on--you may gain some insights that will then help you build your budget farther into the future.

This Guide to Money answer includes the topics: Plan, Budget.

Richard Barrington is a freelance writer and novelist who previously spent over twenty years as an investment industry executive.

 

1 Responses to " How Do I Create a Budget? "

  1. 1
    Rajeev Kumar // says:

    Good article. Getting started with a budget is a difficult first step. Speaking from my own experience, having a budget is very comforting as the budget puts everything out there for you. There are many online tools that let you track money and there are a couple of tools that let you assess your financial situation, make a plan and track the progress. If you are not using a tool, I recommend looking into tools that fall in the 2nd category. -R

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