Make A Budget in Three Steps

When talking about living on a budget, people sometimes mistakenly equal it to living cheap. The fact is living on a budget has nothing to do with living cheap. Instead, it means living organized. Particularly, for those who live from paycheck to paycheck, a budget is the tool that lets them prioritize their spending and, thus, get a handle on their financial situation. It will help them cut costs, prepare for the unexpected, gain control of spending, start to save and, eventually, build a safety nest for the future. Budgeting itself seems to be a tedious job sometimes. However, the long-term benefits of developing healthy spending habits, achieving financial goals, living debt free, and enjoying a comfortable retirement through budgeting is far more rewarding over any short-term difficulty people may experience.

What You Need to Know Before Creating Your First Budget

Before creating your first budget, there are a few things you need to do.

First, understand where you are today so you can plan for where you want to be tomorrow. Second, examine your current spending habits so you know where your money went. Since a budget is actually a schedule of your income and your expected expenses, you should have a clear picture of how much you take home and how the money was spent each month. You don’t want to just enter arbitrary numbers into your budget. If the numbers are too far off, then you lost the purpose of letting a budget help you reach your financial goals.

While it’s much easier to figure the exact monthly income from all sources, knowing where your money went isn’t going to be easy, especially if you have never tracked your spending before. A good place to start the process is your file cabinet where you keep your monthly credit card bills, bank statements and all the other bills. Go though the files and break down all expenses into categories (such as utilities, groceries, insurance, clothes, dining out and entertainment to name just a few) to figure out where and how you spent your money. Then group spending categories into, for example, obligations, necessities, allowances, and unexpected, etc, to have a big picture view. By examining a few months of history, you can gain a sense of how much you typically spend on each categories so that an achievable, realistic budget can be built accordingly.

And don’t forget saving too. A budget isn’t just for cost cutting. It also helps you reach your goals, from vacation money, emergency fund to car and house down-payment, even your own retirement. Compare your monthly income against total expenses to see whether you will have a surplus at the end of the month or not. If you do, then put the money aside as savings. In addition, setting priorities for each saving category allows you stay focused on your goals, short-term as well as long-term ones.

How to Create a Budget

A budget usually consists of three parts: Your monthly income, your monthly expenses, and whatever left at the end of the month. In case you are not up to the task of creating your family budget from scratch yourself, you can easily find many ready-to-use tools to get you started quickly, some are free, some are not. Professional budgeting software such as You Need A Budget is an excellent family budgeting tool. However, before you invest in a fancy financial software, make sure you check out free tools first to see if any of them can meet your needs.

If you are savvy enough, you can create the simplest budget with an Excel spreadsheet. To make things easier, Google has free spreadsheet templates for you to download, modify, and use right away. Other free money management websites such as Quicken Online (here’s a brief review of Quicken Online if you are not familiar with it) and Mint are also good tools in creating, analyzing, and managing your budget, along with other functions that can be used to manage your finance. Keep in mind that it’s not important which tool you choose use. It’s whether or not you can achieve your goals with it that determines a success or failure. You can buy the most powerful budgeting software out there, but it will be just a wast of money if you can’t make it work for you.

Evaluate Your Budget and Stick to It

Setting up your budgeting software¬† and entering the numbers you want to see in your new budget aren’t the end of the road. In fact, it’s just the beginning of a long journey to financial freedom. What you have just finished is an easy job. Following your budget month after month, year after year is the hard part.

Many people blame the negative attitude they take towards their budget for their failure because tracking down every penny sent isn’t an exciting job. Unable to see any quick result is discouraging. It could even make you wonder whether a budget can really help you meet the goals you set for yourself. Unfortunately, there’s no other way around it. If you want to see the results (the vacation you want to take or the new car you want to buy), then the best course of action you need to take is sticking to your plan and constantly evaluating your progress. Once you have a full month of income and expenses in the book, compare your actual spending against your projections and identify areas where you can improve and revise your budget accordingly. That’s the process of balancing your budget and it’s also not an easy task because it may requires cutting back on things. When balancing your budget, you to make sure that your spending don’t go over your income while your savings goals are still adequately funded.

Final Words

A good budget is both a process and a product. Budgeting doesn’t have to be stressful. To the contrary, it will be financially rewarding in the long-term. Be creative and innovative in allocating where your money should go. Once you reach a goal through careful budgeting, treat yourself with a celebration (within the budget of course). If the goal is the vacation you have long planned for, go ahead and take it because you have earned it.

April is National Financial Literacy Month. My contribution to this event, on the last day of the month, is an article that I wrote early on how to create a budget. It is an expanded version of a post that was posted on Quicken Online Blog.

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