Creating a Budget

If you find yourself wondering any of the following regularly, you’ll want to consider creating a budget:

  • When will that bill come due? Will I have enough money to pay it?
  • Will I have enough money to pay in two months to pay rent?
  • Can I afford those shoes?
  • Why can’t I save enough?

A budget is financial plan you make that tells you how you’ll spend your money that month. When done well, it relieves the stress of financial uncertainty and empowers you to make long term plans.

Getting Started

A budget relies primarily on two categories of information: income and expenses. To build out an idea of where your budget currently is, you’ll need to gather some information from these categories.

  • Money coming in (Income): paystubs and any other form of consistent payments made to you (child support, alimony, settlements, annuities, etc.)
  • Money going out (Expenses): rent, utilities (gas, electric, water, trash, internet, phone, etc.), insurance (rental/home, car), food (eating out, groceries), transportation (gas, tickets, etc.), tuition, loans, etc.

Now, you’ll need to gather all that information into a single document or table that makes that information easy to read, such as this Budget Worksheet from the Federal Trade Commision. You’ll want to total the amount of income you have and the amount of expenses you have. Subtract the expenses from the income to find out how you’re doing each month.

If you have more income than expenses, yay! You’re on the way to savings! However, if you’re like most people, you may find that your expenses are more than your income. If that is the case, hope is not lost. There are several strategies to consider now that you have an idea of your monthly budget.

Balancing Your Budget

Now that you’ve calculated all the numbers, look through your expenses to see what items you can adjust or cut from your list.

For instance, if you’re spending $50 a month at your favorite restaurant and you’re spending far more than you earn, consider cutting back on this “want” to balance your budget. Many people use the 50/30/20 rule, which calls for putting 50% of your total after-tax income toward needs, 30% toward wants, and 20% toward savings and other financial goals.

This step takes the longest, but getting your finances under control is definitely worth the effort.