6 Steps to Creating a Budget

The word “budget” is often met with resistance and avoidance. However, a budget can be the single best tool to make the most impact on reducing your spending and stretching your dollar further than you thought possible. With a budget in place, your money has a purpose and gives you boundaries when it comes to your spending.

There are several steps to follow when building a budget that works for you and your family.

Step One: Gather All Financial Statements for X-ray Analysis

The more financial information you have on your past spending history, the better. This includes bank statements, investment accounts, utility bills, credit card statements, and any other information that helps you get a clear picture of how much you spend each month.

Step Two: Examine All Income Sources

Closely examine all of your forms of income over the previous year expected to be recurring and record those. Be sure to include extra income other than just your regular paycheck. This would include interest payments and any other outside income. If you have a year’s worth of these records, you are able to get a full picture of your annual income. Divide this amount by twelve for your average monthly income.

Step Three: Prescribe a List of Monthly Expenses

Create a list of all the expenses you anticipate each month. These would include items like mortgage payments, car payments, auto insurance, groceries, utilities, retirement savings, and anything else you spend money on regularly. For assistance and a clear idea of what you spend each month, refer to the financial statements gathered in step one.

Step Four: Extract Expenses into Two Categories: Fixed and Variable

Your fixed costs are expenses that stay relatively the same from month to month. These would include house payments, car payments, utilities, and anything else that is a recurring regular expense. These expenses are essential and are not an optional expense.

Variable expenses are things that change from month to month. These can be things like food, gas, eating out, entertainment, and gift giving. Some of these items are optional (like entertainment) and others are not (like food). These are the items will allow you to make adjustments in your budget.

Step Five: Diagnose Monthly Expenses: Income or Monthly Expenses

Figuring out exactly how much you are earning each month, as well as how much you are spending will give you a clear picture of your financial situation. If you are spending more each month than your income, drastic cuts in nonessential areas are in order for a successful budget.

If, however, your monthly income is greater than your expenditures, you are off to a great start. You will then determine which area of your budget is the biggest priority, such as credit card debt, retirement savings, or a building up an emergency fund. This is where you will funnel your excess money each month. The ultimate goal in this exercise is to make your income and expenses equal each month.

Step Six: Give Your Budget a Regular Checkup

A budget is a process and not an ending point. As your life changes, so will your expenses and income. It is important to review your budget regularly to make sure the income/expenditure areas are still equal. If one area of your budget seems to exceed your allotted amount, make an adjustment. This means allowing more money in one area while taking money out of another area. Particularly with a new budget, even a monthly review is crucial to build a successful budget.

Creating a budget does not have to be a difficult process. With a thorough examination of your financial situation, both what you are bringing in each month, as well as spending, you can set up a budget that works for you and your family.