Four Steps to Setting up a Budget

Setting a budget can a difficult thing for anyone to do, it requires a discipline that most of us have trouble exercising.  Try setting a goal such as an early retirement, or a special trip as these can be great motivators for keeping your budget.  If you are setting up a budget for your family, make sure that all everyone that has to follow the budget, has input in the budget.  Setting up a budget will take some time, so make sure to give yourself plenty.  I would  like to walk you through the four steps that I think will help you set a budget.

Put simply, how much do your make.  Get out a months worth of your pay stubs, or two months if your salary fluctuates a lot.  Look for the line on your pay-stubs that say NET INCOME, as this is your take home pay.  Add all your pay together and then divide by the months worth of stubs you have.  Do not forget to add your miscellaneous income such as child support, or dividends you intend on keeping.   The number you just arrived at is your monthly income.  Put this number at the top of your budget, as it is the amount of money you have available to spend.

There will be a few different types of expenses that we will cover. But to get us started gather your monthly bills, and receipts if you have them. Some of your bills will be considered fixed expenses, while others will be considered variable expenses. Do not estimate your expenses as this will only make your budget harder to follow. Now lets get started with your fixed expenses.

Fixed expenses are going to be your bills that don’t change or change very little from month to month. Some examples would be your house, car payment, credit card payments and utility payments. Add all these expenses up and write that number just under your income. Subtract your fixed expenses from your income. You know have a new total available cash.

Variable expenses are those that change from month to month. Some examples would be your food, gas, entertainment, doctor visits, prescriptions, and gifts. To get these expenses you may have to track them for a month or two. Make sure to add a savings plan to your variable expenses. Add up all these expenses and subtract them from your current available cash. This is your surplus or your deficit.

If you have reached this point and you are satisfied with your available surplus skip to the next step.  For those of us that have some work to do read on.  This is where you look back through your Variable expenses and see where you think you’re spending too much.  This could be as little as not stopping for coffee in the morning, to something as big as price comparison shopping the grocery stores.  Whichever the expense, however you choose to cut, make sure you don’t feel as though you have deprived yourself.  It is better to cut small amounts from a couple of things, than cut out an entire expense.

Use a spreadsheet on the computer, or an accounting book from the local store.  List your expenses and the amount you have planned to spend on each of them.  Set up your spreadsheet so that you can enter and amount that you have spent weekly on each expense.  If you have spent all your coffee money for the month in the first week decide whether you set a realistic goal on coffee spending.  If you think your goal was realistic then wait till next month to buy another coffee.  At the end of the month you will see how well you were able to stick to your budget.  Do you have money left over to save or spend on special things?

Budgets are not always a concrete thing.  As your income increases or decreases you may need to adjust your budget.  As you learn to control your variable expenses you can set goals on what to do with your extra money.  Remember that even though our goal in budgeting is to stay in the black, sometimes an unexpected expense comes along that kicks us into the red.  You must work hard and be persistent in your efforts, for a budget is not an easy thing to follow.  Enjoy your new found cash and the opportunities it will bring.