A budget can help you crush your outstanding debt, take charge of your
financial future, and even become a happier, more relaxed person.
Depending on your circumstances, a proper budget may not require that
you spend less. Instead, you may simply have to make more effective
financial decisions.
Gather what you need to start tracking your spending history.
Collect past bills, bank and credit card statements, and receipts that
can allow you to put together an accurate estimate of how much money you
spend every month.
2
Consider using software to help you budget. Personal
finance software is quickly becoming the new trend in finance. These
programs have built-in budget making tools that can help customize your
budget, along with analytics that help you project cash-flow into the
future and better understand your spending habits. Some popular personal
finance software include:
Mint
Quicken
Microsoft Money
AceMoney
BudgetPulse
3
Create a spreadsheet. If you choose not to use a
budgeting software, you can determine your own budget by using a simple
spreadsheet. Your goal is the chart all your expenses and income during
the course of a year, so make a spreadsheet that shows all your
information clearly, allowing you to quickly identify any areas where
you can spend smarter.
Label the row of cells across the top (starting with cell B1) with the 12 months of the year.
Create a column of expenses and revenues in column A. You can list
either revenues or expenses first, but try to group expenses together
and revenues together to avoid confusion.
You may want to group expense together with category headings. For
example, you might have a category of “utilities” that includes your
electric, gas, water, and telephone bills.
Decide whether you want to include items that are deducted directly
from your paycheck such as insurance, retirement savings, or taxes. If
you do not include them on your spreadsheet, be sure that you list your
net (post-deduction) income rather than your gross (total,
pre-deduction) income under the “revenue” section.
4
Document your historical budget data for the last 12 months.
Add all of your expenses and revenues for the past 12 months, using
data from your bank and credit card statements to provide an accurate
representation of all of your revenues and expenses.
5
Determine your overall monthly revenue history. Are
you on a fixed salary where you know for certain how much you're taking
home each week? Are you a freelancer whose salary varies each month?
Documenting a year’s history can help you get an accurate view of your
average monthly revenue.
If you are an independent contractor or freelancer, keep in mind
what you bring home is not the same thing as what you earn. For example,
you may bring home $2,500 every month, but that's pre-tax. Figure out
how much you're likely to need to pay in taxes and subtract that from your monthly income to arrive at a more accurate number.
If you are a salaried employee, don't factor in a possible tax refund
into your overall income. Your monthly income should reflect only what
you bring home after taxes. If you do get a tax refund, you'll get to do
with it as you please; if you don't, you won't need to worry about it.
6
List all of your monthly expenses on the spreadsheet.
What are the bills that you have to pay every month? How much do you
spend every week on groceries and gasoline? Do you go out to dinner with
friends every Friday night or to the movies once a week? How much money
do you spend on shopping? Tracking a year of actual spending will help
you develop an accurate view of your spending habits, since most people
underestimate the amount they believe they spend every month.
7
Analyze your revenue and expenses. If your expenses
are greater than your revenue, you are living way beyond your means.
Your budget should be divided into two groups:
Fixed Expenses. These include regular monthly expenses such as
bills, insurance, loan debts, food, and necessary shopping items like
clothing and household products.
Discretionary Expenses. Discretionary expenses are unfixed
expenses that may be “optional.” Items that fall into this category
include savings, entertainment, vacation funds, and other luxuries.
Part 2 of 3: Creating Your Budget
1
Create a preliminary budget. The history established
in Part 1 will help you create an accurate preliminary budget. You
should calculate your fixed expenses and revenue, then decide how you
want to spend your discretionary money.
To calculate fixed expenses, take an average for each month over the
past year, then add about 5%. For example, if your power bill varies
seasonally but averages to $210 per month, you should estimate the bill
at $220 per month.
Be sure to account for changes to fixed expenses, such as paying off a student loan or adding a payment for a new car.
2
Set goals for the bulk of your discretionary spending.
Now that you have determined how much discretionary money you should
have leftover every month, decide how you want to spend that money. Your
goal should be clear, explicit, and actionable. Some short-term goals
may be:
Save $8,000 in an emergency savings fund
Put 5% of each paycheck in a savings account
Pay off credit card balances in 12 months
Save $6,000 for an anniversary vacation
3
Maximize tax advantages. There are ways of saving
money that can offer tax benefits. If you put money directly from your
paycheck into a 401(K) or personal IRA, the money can be deducted prior
to being subject to taxes. Some companies even offer partial matching
for retirement contributions, which can make your savings go even
further.
4
Budget out the rest of your discretionary spending. This part of your budget is all about identifying values.
What values do you have and how do you want to spend your money to
realize them? Money, after all, is a means to an end, not an end in
itself.
What sort of a person are you, and what do you like to do? Many
people end up spending money on hobbies, interests, or charities. Think
of this as investing in an experience or feeling of satisfaction.
Think about what makes you really happy. A popular theory is people who spend money on experiences are actually happier than people who spend money on possessions.
Consider setting aside more money for travel and vacation.
Part 3 of 3: Becoming a Budget Pro
1
Stick to your budget and don’t overspend. This is the
first rule of budgeting, and pretty much the only one. It sounds fairly
obvious, but it's easy to go over budget, even when you have one in
place. Be mindful of your spending habits and what your money is going
towards.
2
Try to reduce your expenses. Larger expenses can be
the most unpleasant but most effective ways to stay within a budget. If
you take an annual vacation, consider staying home this year. Smaller
expenses can also add up.
Try to identify and cut back on any expensive luxuries you enjoy. If
you enjoy a weekly massage or have a preference for expensive wine, cut
down on the frequency of these treats so you’re spending money on them
only once a month or once every second month.
Save money on smaller expenses by switching to generic brands and
eating home more often. Try not to go out to eat more than one or two
times every week.
See if you can reduce any of your fixed expenses by switching to a
less expensive cell phone plan, reducing your television package, or
improving your home’s energy efficiency.
3
Treat yourself periodically, but within reason. Your
money has to work for you, not the other way around. You don’t want to
feel like a slave to your budget, or to money in general, so it’s
important to allow yourself a small treat every month that won’t break
your budget.
Don't abuse your own rewards system to the point where it gets
counterproductive and ends up affecting your budget. The idea is to
treat yourself to smaller, cheaper items like a latte or a new shirt and
to avoid splurging on more expensive items like a vacation or a pricey
pair of shoes.
4
Pay off credit card balances every month. If you use
credit cards, you should try to keep them at a zero balance every month
to avoid costly fees. If you cannot pay of the current balances,
prioritize paying them off within a reasonable time period so that you
can get to zero balances.
Try switching to cash payments for most weekly
purchases—particularly “extras” like eating out or coffee shop lattes.
This can help you control your spending, as people are more aware of the
money they’re spending when using cash than when swiping a card.
5
Cut your taxes. Take better advantage of itemized deductions when you file your taxes every year.
Start keeping your receipts, especially if you're an independent
contractor and work from home or remotely. There are many amenities you
can expense as part of your contract work when doing your taxes.
It’s a good idea to research ways to get a better tax refund as a
contractor or ask your accountant how you can get a better refund.
6
Appeal your home assessment. If you're a homeowner
and have sufficient evidence, you might be able to cut your real estate
taxes by challenging the value that a home assessor puts on your
property.
7
Don't count on windfalls. Don't factor in potential
(unsure) sources of revenue, such as year-end bonuses, inheritances, or
tax refunds. You only want to include guaranteed money in your budget.
Tips
Save your loose change in a jar and then take it into the bank to be
rolled. You’ll be surprised how your small change can add up.
Avoid debt in the form of high-interest credit cards and payday
loans, as they will incur high interest and end up costing you quite a
bit of money, especially if you will struggle to pay off your bill on
time, every month.
