how to create a budget

Creating a Budget

A Budget  is a realistic plan you put together based on your income, expenses, and goals.  Creating a budget does not mean all of your financial problems will be solved, but it is vital for financial wellness. Once you complete this list you will be able to show where your money is coming from, how much there is, and where it is all going. The following list will help you begin.

 

1) Gather financial statements.

This includes back statements, investment accounts, recent bills, and any other information regarding income or expense. If you are self-employed or have any outside sources of income be sure to record these as well.

2)Create a list of monthly expenses.

Write down a list of all the expected expenses you have over the course of a month. This includes a mortgage payment, car payments, insurance, groceries, utilities, any savings account you transfer money to regularly, ect.

3)Break expenses into two categories: Fix and Variable.

Fixed expenses usually cost about the same each month and are absolutely necessary for your way of life. (Mortgage, car payments, cable/internet, trash pickup, ect.) Beware of luxuries disguised as necessities!

Variable expenses are the type that will change month to month. This category is where you are able to make the most adjustments (Groceries, gasoline, entertainment, eating out, and gifts)

4)Total your monthly income and monthly expenses

If your monthly income is greater than your monthly expenses you are off to a good start. This means have excess areas of your budget where you can invest in things like retirement savings or paying more back on credit cards to eliminate debt faster.

If you are showing higher expenses than income, you will have to make some changes. Aim to spend no more than 90% of your income.

5) Make adjustments to expenses

When expenses are greater than your income you should first look into your variable expenses to find areas to cut. Since these expenses are typically not essential it should be easy to shave a few dollars in multiple areas which will add up at the end of the month. You might remember the chart we put out showing how skipping your morning coffee from Starbucks.

The goal here is to get your expenses and savings equal, this means all of your income is accounted for and a budgeted for a specific expense(Remember, things like college and retirement funds are expenses.)

6)Review your budget monthly

It is important to review your budget on a regular basis to make sure you are staying on track. After the first month take a minute to sit down and compare the actual expenses versus what you had created in the budget. This will show you where you are, how well you did, and where you need to improve.