How to Create a Budget

Wed, Jun 10, 2009

Having a budget is probably the first step in getting your finances under control and performing wise money management. In a few simple steps you can create a budget to begin proactively planning and guiding your spending each month.

Guidelines to Consider in Creating a Budget:

There is plenty of personal finance software on the market today used to create a budget and track spending. If you’re just getting started, I recommend setting up a budget in excel or using a form in which you can fill out with a pencil.

Tithe, house, food, auto, insurance, debt, entertainment, clothing, savings, medical, miscellaneous, investments and school/childcare are good starter categories.

Unless you’ve been tracking expenses each month, your first budget is an estimate. Once you’ve tracked spending against your budget categories for a few months, you can make changes where you may have estimated too high or too low.

A budget must balance. The nice thing about a budget is that you’re either forced to cut back spending in certain areas or allocate extra income to spending categories. Don’t worry; your initial budget probably will not balance. Going through the process of prioritizing spending and allocating the money may take a few iterations.

Steps for Creating a Budget:

Identify a budget tool or form that includes the ability to track spending by common categories. Here’s an example of a good budget form.
Determine your spending priorities: On a separate sheet of paper list all your expenses and prioritize by placing needs at the top of the list. Examples of needs: food, clothing, shelter.
Estimate the total monthly amount required for each category on your budget form.
Subtract total expenses from your net income to see if your plan is in balance.

If you’re balance is negative, reduce estimated category amounts starting at the bottom of your priority list. If you have a positive balance, allocate the money to a category.

If you find you need more money for a category one month, such as food (maybe you had a guest in town), you must take money from another budget category to meet the need and to keep your budget in balance.

You should now have an initial plan in which you can follow each month. Don’t stop there. Remember to review your budget each month against last month’s actual spending.

Do you need to make adjustments? Most likely, the answer is yes. Your spending will vary depending on the time of year. For example, most people increase spending around Christmas time.

Can you think of some useful tips or other guidelines for people when creating a budget?