Budgeting Basics

Creating a budget is certainly not a walk in the park. Budgeting is an ongoing process and for most people, your budget has the possibility of changing from month to month. Your first try won’t be perfect, but don’t get discouraged.  As with most things in life, the more you practice budgeting, the better you’ll get. Once you figure out a flexible and successful process that works for you, you’ll be ready to go! Before you start, make sure you have 30 to 45 minutes set aside to work through each step. Let’s get started!

Income

Let’s begin at the most obvious place: your income. As we all know, your income is going to determine your budget, or in other words, how much money you have to spend. Your income can come from a variety of sources: your main day-to-day job, side jobs, child support, or even rental properties. It includes any source that brings money into your household each month. To start creating your budget, record the total amount of money that you’re making.

It’s important to take taxes into account, so make sure you’re recording your monetary income post-taxes. Some people refer to this as your “take home pay.” If you’re married, you’ll potentially be combining your incomes, so record them on the same budget.

Plenty of people are self-employed, which makes a budget all the more important. Your month-to-month income may be unpredictable depending on your business. If you have no reason to believe that your income will significantly drop in the upcoming month, average your monthly income for the last 3 months and use that for monthly income.

Expenses

The next part (that no one likes to think about) is what you spend your money on. Though expenses have their own categories, you always have regular “offenders” every month like your utilities, mortgage, or car payment. Sometimes utilities can sway a bit from month to month, but in general, they stay consistent.

You can’t forget about the other necessities like groceries, gas, clothing, household necessities, and other miscellaneous items. For your budget, it’s important to take into consideration everything that is going to require money. Depending on your family’s spending lifestyle, do you need to add or delete any categories? Think about this before moving on to the next step.

Set Priorities

Maybe you have student loans to pay off or maybe you and your spouse have a baby on the way. No matter what situation you find yourself in, your budget health relies on how well you prioritize.

  • Groceries: You have to feed you and your family, so first and foremost, set aside enough money for food. This should come before you worry about other bills. You may have to adjust it a bit depending on other expenses.
  • Utilities (Electric, Water): You have to keep the water running and the lights on, so these should take next priority. You might be asking, “isn’t my mortgage more important?” Well, living in a house without lights or water is no fun. The utility company won’t wait to turn your water and electric off if you don’t pay them. You tend to have slightly more leeway with your mortgage payment.
  • Mortgage or Rent: Don’t put this off unless it’s a dire emergency. Stay on top of it and don’t let it slip to the bottom of the pile!
  • Gas/Fuel: You have to put gas in the car to get to work, and if you can’t get to work, well, you’re not going to need a budget. (This is not a good thing!) Pay the monthly car payment and keep some gas in the tank. Tip: Be smart about your trips or try carpooling.
  • Clothing: You need to look appropriate at work and the kids need to be dressed for school, so if you’re only spending money on necessary clothing, that’s great! Don’t feel required to buy name brand clothing or accessories.

Once you’ve covered these 5 categories, you can move on to other sections of your budget that may vary from person to person. If you still have money left in your budget, you can include things like: Date Night, Cable, Family Entertainment, and other fun categories that should only be a part of your budget if you can afford to spend real money on them (not credit).

Final Touches

Many websites have free budgeting templates that will get you started. These make it pretty easy to figure out spending for monthly bills, since they don’t change much. You will have to make an estimate for gas and groceries. We suggest looking over your spending for those categories throughout the past couple of months and then finding an average. It doesn’t have to be perfect, but you do want the most accurate idea of where your money will need to go.

Once you’ve figured out your grand total of expenses, you want to make sure that it doesn’t add up to more than your total income. If you end with a negative number, you’ll need to go back through and see what unnecessary spending can be cut out. If Income – Expenses = $0, you’ve successfully created your first budget! Some people prefer to have their final number greater than $0, just to provide a little wiggle room. This is naturally preferable so that you can begin to build up a small savings.

As you go through the next few weeks, chances are, you will have to make some edits to your budget. This is more than okay. Remember, it’s a process and it takes time to figure out. Don’t be discouraged at the thought of having to create a budget; instead be proud of yourself for taking a step towards managing your money skillfully.

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