How to Budget

This article covers the essential elements of how to budget. If this is your first time creating a budget, determine how you want to draft or make your budget.

You can go "old-school" with a simple notebook, use a spreadsheet program, or buy budgeting software such as Quicken or Mint. All yield the same outcomes from a planning perspective. What's important are the accuracy and completeness of the numbers that comprise your budget.

Your Budgeting Starting Point

Before you can figure out expenses, you need to figure out your earnings. If you have a single paycheck, that should be easy. If you have additional income from part-time jobs, online ventures or selling things online, then you also need to add that into the mix.

If your extra income varies from month to month, try to come up with an average.

Next, you need to make a list of your "fixed" categories/expenses. These are the essential things you have to pay for every month, such as your rent/mortgage, your utilities, insurance premiums, etc.

For example, paying your rent is not optional, but paying for your gym membership is. And yes, you might love/need/want the gym, but that doesn’t mean it’s not optional, so don’t make it part of this group.

Also include debt repayment on credit cards and loans as mandatory expense categories. Likewise, you will want to set aside a certain amount for saving for retirement and also establishing an emergency fund.

Don’t forget to account for expenses that come in without a bill, such as the gas for your car or paying the babysitter.

The Next Step

Once you’ve figured your fixed expenses, you can then focus on how to budget whatever money you have left. These will be your “variable” categories. The more categories you create, the more detailed your budget will be. While more complex, you will have a clearer picture of exactly where your money is going.

Examples of categories to include are:

  • entertainment and eating out
  • health and beauty
  • clothing
  • transportation
  • maintenance (home and car)
  • groceries

When it comes to food, you can use a single category (groceries) for everything household, including food, pets, and household supplies.

If you’re having trouble managing your expenses, though, it might be wise to split these into three different categories, so you have a better understanding of where your money is going.

However tempting it might be, don’t create a “miscellaneous” category. This ends up becoming a catch-all for those things you know you shouldn’t have spent money on. Instead, get used to placing every expense under one of your standard categories.

For example, a gym membership could be health and beauty and that bar of chocolate candy could go under either groceries or entertainment (you did have fun eating it, didn’t you?).

If you have specific expenses, such as education or business supplies, create additional categories for them.

How to Budget For Financial Success

Before you can start to make changes in the way you handle your money, try keeping an expense diary for at least two months.

During those two months, try not to change the way you normally spend your money, but make sure you write it all down.

At the end of each month, figure out your total expenses. Are you spending more in one category than you thought you did? After you’ve paid for all your essentials, where is your money going? Do you have enough left?

Once you understand your spending habits, you can change them. Can you really afford to spend $200 a month on entertainment? If the answer is no, pick an amount in advance (let’s say, $75) and write it down as the goal for that category. Do the same for all your variable expenses.

Work the numbers until you end up with a total that’s lower than your income. It’s a good idea to review your budget regularly, especially if your expenses or your income suddenly change.

For more on how to budget, click here: Budgeting Tips. In addition, review the article links below for additional information.

Related Information - How to Budget

Introduction to the Concept of Personal Budgeting

Budget Category Percentages

Envelope Budgeting - Is it Right for You?

How to Live on a "Shoestring Budget"

Ideas for Saving Money

› How to Budget

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