Learning how to make a budget is a simple way to plan and reduce financial stress. Budgeting is always important whether you’re in a well-paid job, looking to save for a big vacation, or struggling to make ends meet on a day-to-day basis.
Budgeting will not only allow you to plan for your expenses, it will also enable you to plan for unexpected costs like major vehicle or home repairs.
By having money set aside for emergencies, as part of your budget, you won't risk increasing credit card debt or have the need to take out a loan that can be difficult to repay with your other financial obligations.
Budgeting does not mean getting rid of everything enjoyable in your life. But, it may mean that you have to make some serious decisions about what is important to you and your family.
How to Make a Budget Work for YOU
When making a budget, it is important to follow a thoughtful, step-by-step process to get a realistic view of your current financial situation and then identify where you can save.
Earnings: Begin by listing of all of your income sources for a typical month. Exclude money that comes in unexpectedly or irregularly, such as lottery winnings or cash gifts for your birthday or other occasion.
Fixed Expenses: Make a list of all the bills you pay that reflect fixed expenses – those that don't typically fluctuate from month to month. Your list will likely include your mortgage or rent, insurance, car loans, phone, television, internet, utilities, and other loans you are required to pay. These fixed costs should remain untouched in your budget, as you are contractually required to pay these financial obligations.
Regular monthly bills for gym memberships, movie clubs or other related products and services may be variable expenses (see below). This means that you may be able to cancel monthly billing for these services if you need to cut costs. This depends on the agreement you have with the provider.
Other Critical Fixed Expenses: For your fixed monthly costs, be sure to include contributions to a retirement fund. Talk with a retirement expert about how much to reasonably save each month so you can live comfortably when you are ready to retire.
In addition, make regular contributions to an emergency fund, as noted above. Your emergency fund should equal four to six months of earnings to protect you from unexpected costs that are out of your control.
Savings for your children's college education should be viewed as a fixed cost, as well.
Variable Costs: Once you have detailed your fixed monthly expenses, look at your spending habits and itemize your other monthly costs, which are variable and fluctuate. This includes what you pay for groceries, eating out, sundries, medical expenses, clothing, music, gas, entertainment, home and car maintenance, lawn upkeep, etc.
Consider collecting receipts and tracking all of your expenditures for up to three months. Calculate the average you spend monthly on variable costs. This can be eye-opening when you are learning how to make a budget. You'll be able to closely examine your spending and see exactly where your money is going each month.
Comparing Income to Expenses: Once you've detailed all of your fixed and variable expenses, see how they compare to your income. Add up your monthly earnings and subtract your expenses to see if you get a positive or negative number.
If you get a positive number, meaning money is left over, you’re doing well. You can plan on using the extra cash to save for a large purchase, vacation, or to increase your retirement account.
If you get a negative, you’ll need to look at balancing the equation.
How to Make a Budget Work by Reducing Spending
The best way to fix negative cash flow when you are learning how to make a budget is to reduce or entirely cut some of your variable costs. Not paying bills is certainly not an option. Rather, look for ways to save by eliminating "nice-to-have" spending vs. necessary spending.
For example, instead of going out to dinner once or twice a week, prepare more home-cooked, less expensive meals and enjoy time at home with family and friends.
Here are some other ways to reduce spending.
These are just a few ways that you can save money without compromising your lifestyle, as you learn how to make a budget that works for you.
How to Make a Budget Work by Increasing Income
The other slightly harder way of making your budget balance is to find ways to increase your income. This could range from asking for a appropriate pay raise at work or taking on a second job.
You can also earn small amounts of money on the internet by selling items online or taking surveys. Remember that any additional money that you earn needs to be declared on your tax returns, even if it is paid cash in hand.
Once you have determined how to make your income and expenses balance, it's time to put your budget in writing and document each expense. Then, closely track your spending each month to ensure you stay on budget and in control of your finances.
For information on hot to make a budget, see the related articles below.