10 Step Guide to Creating a Budget  

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Creating a budget may sound like a daunting task, but there are a lot of ways to create a budget and a lot of apps and websites to help you do so. Links to them are available below. What you use to manage your budget is entirely personal preference. The important part is selecting a tool and method that works for you. I have personally used a number of apps from You Need a Budget to the Quicken desktop software. Are you a fan of Dave Ramsey? Even he has his own app. In my case Quicken turned out to be far more complex than I needed and YNAB turned out to simplify things a bit to much.


In the end, the thing that ended up working best for me was Google Sheets. I know, "that's so much work!" you say, but that turned out to be exactly what I needed to truly grasp what my finances were doing. So, I will guide you though the basics of creating a budget. If you want to use a fancy program that is fine, but I ask that for at least your first iteration of this, you stay basic. Bust out Excel, or Google Sheets, or even a piece of paper and lets get down to business.



Setting up Your Budget


Step 1:

If you skipped the intro paragraph, grab a piece of paper or open up a spreadsheet and at the top right of it, write your net income a month. Remember that your net income is the amount you get to take home after taxes and any other deductions you or your employer make for things like medical coverage or company benefits.



Step 2:

Put down every bill and recurring expense you have. This is an important step in creating a budget. Things falling under this would be your phone bill, car payments, rent/mortgage, insurance, Spotify, Netflix, etc. Done? Next, right down next to it the date each are due.



Step 3:

Review your most recent statements across all your accounts. Checking, savings, credit cards, all of them. Make sure you correctly noted every recurring expense you have. Then order them by date. This is one of the most important steps you can do when creating a budget as it will allow you to see the expenses that you know will always come in and that are fixed or mostly fixed costs.


Step 4:

Now, using your statements, categorize all your other spending. For example if you are a frequent coffee drinker, find all the coffee purchases you made. Create a Coffee label on your paper or your spreadsheet and write the months sum of all coffee purchases next to it. Do this for all other purchases you have made. How exactly you break this out is up to you, the important part is to remain consistent with how you track things in the future. Here is an example of how your paper/spreadsheet should now be looking:


Step 5:

This one is really simple. Sum all the values under cost, this is your total monthly spending, and compare it to your net income you wrote at the top right of your spreadsheet. You did do that step right?

Now, is the amount you are spending greater than the amount you bring in? If you then you will have some work to do later. If not, then good for you! This likely means you have money that can be working harder for you.



Step 6:

Now that you have all your expenses listed and categorized, creating a budget is fairly simple. You can basically just rename your "cost" field to "budget" and a good chunk of the work is now done. You know your recurring costs are pretty static, for everything else it's just a matter of estimating how much you believe you will spend on each category you have created and then make that the budget. So for example, last month we spend $197.35 on Groceries. The month prior lets say we spent $205.67. So for our budget, lets say we will set aside $200 to be our grocery budget. For gas, we will say it will be $110 even and coffee we'll say we want to set aside $70. Continue in this fashion though all the non-recurring expenses in your list. Here is an example of how it should now be looking.

If in step 5, your expenses were more than your income, continue to Step 7. If your expenses were less then your income, continue to Step 8. Bet you weren't expecting a choose your own budget adventure were you?!


Step 7:

So your expenses are more than your income. If you are finding yourself swimming in debt, then this is actually good news! Why? Because it means you have identified a key problem to why you are in debt. To fix this, you simply need to adjust your budget until the amount you are spending is under what you bring in. Start this process by first seeing if you can reduce your spending under your categorized items.


For example, can you maybe reduce your coffee spending by half each month? Could you skip the potato chips at the store and reduce your groceries to $150? Don't just look at your categorized items either, look at your recurring expenses. Do you really need Netflix and YouTube TV? If you find yourself using one more than the other then you can look at cancelling the service you use least. If you are truly in a financial bind, you should consider cancelling everything except the absolute life necessities. This will suck big time short term but can provide much needed financial relief depending on your situation. There are some great hidden tricks you can use on some services which I will write about and link here at a later time.


Step 8:

Congrats! Your expenses are less than your income! This is fantastic, and a major milestone when creating a budget. Now the next step is to utilize that extra money to work for you. While you do want to make sure you are bring in more than you are spending, you also want to make sure that at the end of the month, you have utilized every free dollar you have.


For example, if you are in debt, then this extra money should probably go towards paying that extra debt down. This can be done through various methods such as the Snowball or Avalanche method or my own method which I will detail and link to later. If you are not in debt, then you should look at putting this extra money into a high interest saving account, retirement or investment account. This will allow you to not only put it away somewhere, but allow that money to accrue interest and grow over time.


Step 9:

Check your budget daily! An important part of creating a budget is maintaining it! To truly get reality on what is happening with your finances, check your budget daily. As your recurring expenses come in and you pay them, mark that they are paid by putting the amount paid in the column to the right of them. This basically makes this column your "Spend" column. For non-recurring expenses, as they occur, add this to the running total spend for that category. For example if today I bought chips for $5 and I had already spent $13 under groceries, then I would add the $5 to the $13, so my running total for groceries would be $18.


Step 10:

From here, budgeting is a balancing act between steps six through nine. The goal is to apply self discipline on your spending so that you do not overspend in any category you have defined. If you do, then you will need to rework your budget, reducing how much you will spend in another category to make up the shortfall for your overspending. Remember, your budget is based on the amount you bring in a month, so any overspend has to be either taken from something else in your budget or more money has to be earned to cover it.


Creating a budget this way can be a lot of work, but at least for me, this is what it took for me to really grasp what my finances were doing and how to handle it. However, as I mentioned earlier, there are many websites and programs out there that make this process a lot easier. My only recommendation is do make sure you understand the basics mentioned here so that you understand the principles with which these programs and tools operate.


Websites & Apps:

Personal Capital


Every Dollar

You Need A Budget


This topic was modified 1 year ago 3 times by mtipsey
Posted : August 7 8:52 am

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