I had someone ask me recently, “How do I put together a budget?” It dawned on me that budgeting is not a straight forward process. It does take some explaining as well as trial and error to start to get the hang of it.
Here is how to create a budget:
1. Gather All of Your Financial Data
This includes bank statements, credit card statements, or any other paperwork that shows your monthly expenses and income. We actually use an online service called Mint.com to track our non-cash expenses. It is a free service that will link all of your financial accounts to one place so that you can see your entire financial picture on one page. This takes a lot of the nitty-gritty detail work out of the equation. Instead of needing to add up all of my vehicle expenses for one month, Mint automatically categorizes those purchases for me. All I need to do is go in and make sure that they are categorized correctly.
2. Begin Adding Up All of Your Income and Expense Items
Whether you manually add up all of your items or let a software program do it for you, this is how you begin to expose any weak areas of your budget. For instance, you may add up your grocery expenses and realize that you spend $700/month at the grocery store. If you are looking for an extra $300 per month to save, pay off debt, or invest, this would be an area you could cut back to achieve your financial goals. If you are looking for ideas, see this post by Lydia at Parents.com called 4 Things I do to keep our Grocery Budget at $200/mo. for a Family of 4.
3. Enter Those Totals on a Piece of Paper
What Kim and I used when we were paying off our debt was what I like to call the Financial Gameplan form. There are 3 tabs on this form. The first tab is instructions on how to use the spreadsheet The second is the actual Financial GamePlan form where you will enter most of the data. The third tab is where you can enter the detailed expenses of a given category like groceries, vehicle/gas, etc. On the 2 tab you will put the monthly amount you spend in a given category. You should also do the same for your income. If you get paid twice a month than put look at your paycheck and multiply your take home pay times 2. For example, if your take home pay is $1,000 every two weeks, then your monthly income you put in is $2,000 ($1,000 x 2).
4. Involve Your Spouse or Significant Other
This is one of the most important aspects of doing a budget. If your spouse isn’t involved in the budgeting process than it would be very easy for them to spend more every month. Sit down with your spouse and as a couple decide the amount you will budget for each category. There will be areas where he/she will want to spend more, so be flexible. The objective isn’t to live on as little as possible. You want to have a budget that works for both you and your spouse and that helps you achieve your financial goals. Download our Couples Guide to Money to help you through this process.
5. Keep Your Goals in Mind
Ask yourselves, “what do we want to accomplish financially?” Do you want to have an emergency fund? Maybe you want to save for your kids college or perhaps you want to invest more for retirement. When you are doing a budget, these goals help you to remember “Why” you are doing one in the first place. (See the Importance of Setting Goals)
Have more questions about budgeting? Ask me by clicking here.