How to Create a Workable Budget – Part 1

If you don’t have a budget it’s extremely difficult to know where you stand financially, to say the least.  There are some people however who have set up budgets, which is excellent, but don’t use them as well as they could, which is less excellent.  With that in mind we’ve put together a 2 Part series on creating a budget that you can work with.

By the way, the first part of working with any budget is to remember that it’s simply a tool to make you aware of where you spend your money and a guide that helps you to spend only on the things that matter most to you.  Treat it as a tool, like a hammer or screwdriver, and use it to keep your financial house in tip-top shape.

Step 1) Categorize!  Everyone spends differently.  Categorizing your spending helps you to make a budget that works for you.  With categories you’ll be able to see what you’re spending and track it much better, something that you need to be able to do easily so that you continue to use your budget rather than let it fall to the wayside.

Categories like car payment, mortgage and energy bills are obvious. Next is to set up some categories that reflect your spending.  Do you eat out every day, or bag your lunch?  ‘Lunch/Work’ is a necessary category if you eat out 4 or 5 days a week.  Do you have a hobby like train collecting?  ‘Hobby’ needs to be one of your categories.  The same goes for sports, clothing and anything else that reflects your typical spending habits.  The goal with this is to become hyper-aware of where your money is being spent so that you can easily track it, curb it or increase it whenever necessary.

Step 2) Calculating the budget amount for each category. The first task here is to either already know, within 10%, what you make every month in gross income or if you don’t know that amount then you need to collect as many pay stubs as you can and figure it out from those.  If your pay changes substantially from week to week or month to month you’ll have the added task of figuring out a close monthly income approximation. Remember to add in all of your income, including dividends, bonuses, interest income or any other type of income that you have like a side job.

You should already have a budget worksheet (if you don’t they are all over the net) so now you can start listing your monthly expenses on it.  Go back at least 3 months to be thorough and make your new categories as you go.  Don’t get too detailed because you want this to be something relatively easy to work with and if it’s too detailed it will become a chore to use long term.

The goal here is to find the numbers that work for you between what you really need to spend every month and what you’d like to spend, and then set a number that’s between the 2 so that you have the money you need to pay bills and make some incidental purchases but also have money left to save and / or invest at the end of the month.

Surprisingly even ‘fixed; costs like housing costs or utilities can sometimes be lowered.  Start the process by reviewing the last few month’s bills for now and, when you have a better grasp on everything down the road, you’ll be able to look for, spot and take advantage of more ways to save.

That should get you started.  We’ll see you back here soon for Part 2!

 

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