6 simple steps to creating a budget

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Photo Credit: Wonderlane, cc

Many people avoid budgeting – it’s a chore, it’s too hard, it’s boring – but while creating a budget is probably not going to be the most exciting use of your time, it very well may be one of the more important things you do. The aim of a budget is to track your income and expenses, providing a roadmap for your spending. A budget will help you from frivolously spending every dollar you get your hands on, but it can also help you know what the extra money left over at the end of the month is for.

Creating a budget doesn’t need to be difficult. By following the six simple steps outlined below, you can easily put together an accurate budget in the course of just a few hours.

Step 1: Choose your timeframe
Your budget will reflect your expected income and expenses over a set period of time. This period can be weekly, fortnightly, monthly, or any other time period which you choose. Most people will choose a timeframe which matches their pay cycle, but choosing an yearly budget is often a better choice as it is easier to factor in seasonal expenses (such as christmas gifts or snow tires). You can always adjust your final figures back to match your income frequency later.

Step 2: Determine your income
Make a list of all of the money you expect to receive over the budget period -  usually this will include employment income in the form of a salary or expected casual rates but may also include government benefits, overtime, bonuses or other income. If you don’t know exact figures just use your judgement to estimate as close as you can.

Step 3: List your expenses
Think of everything you spend your money on over the course of the budget period and make a list of the major categories – similar items can be grouped together. The exact categories you come up with may vary however as a starting point consider the following:

  • Groceries (food, cleaning products, pet supplies)
  • Dining out (lunches at work, special events, coffee)
  • Home expenses (rent/mortgage, maintenance, property tax)
  • Debt repayments (credit cards, personal loans, car loans)
  • Utilities (electricity, gas and water)
  • Phone and Internet
  • Personal Expenses (clothing, haircuts)
  • Health (gym membership, doctors visits, prescriptions, optical)
  • Kids (clothing, school supplies, swimming lessons, hobbies)
  • Gifts (birthdays, christmas)
  • Transport expenses (petrol, car registration and maintainence, public transport)
  • Insurance (home, contents, car, life)
  • Entertainment (movies, video games, concerts, events, magazines, hobbies)
  • Holidays and Travel

Next to each category estimate how much you spend over the course of the budget period – you may find looking at your credit card statements or old bills helpful to do this. If an expense occurs more or less often than your budget period,  use a calculator to match your budget (for example: if you buy groceries weekly but your budget is yearly, multiply your weekly grocery spend by 52). Feel free to add in categories not listed or to split categories into smaller ones if this helps.

Step 4: Add it all up
Using a calculator add together all of your income, is it more or less than the total of all of your expenses? If you have more income than expenses, you have what is known as a surplus, or if your expenses outweigh your income you have a deficit. You’re aiming for a surplus, so if you have a deficit you may need to go back and look at ways to reduce your expenses or increase your income.

Step 5: Stick to your budget
What good is a budget if you don’t follow it? Your goal is now to only spend as much money in each category as you have allocated in your budget. There are a number of ways to make sure you stick to your plan. Some people like to withdraw their money as cash and put it into different envelopes for each category. When the money in each envelope is gone, you can spend no more. Other people like to keep a written log of their expenses using pen and paper . You can even use online tools such as Mint.com or smartphone applications like Mint for Android or YNAB to track your money on the go.

Step 6: Review
Regularly go back and look at your budget – are you keeping your spending within the budgeted amounts? Have you missed or forgotten expenses in your budget which need to be added in? Have you allowed too much or not enough money in certain categories? Over time you can refine your budget to better reflect your circumstances.

While some people may initially find creating and keeping to a budget frustrating or time consuming, it provides an invaluable way to track where your money is going and to determine if you are spending beyond your means or spending excessively in times of unusually high income. Try keeping a budget for a few months and I’m sure you’ll notice a difference in not only your spending, but also your mindset and relationship with money.

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7 comments

  1. Love it! I am all about the budgets! They are one of the most important things you can learn how to do!

  2. Pauline says:

    I take off everything from my entries, like bills and savings, then the rest is fine to spend like I want, that’s as close as I agree to get to budgeting otherwise it seems tedious. If money were tight I would have to but I think overall I am not doing too bad with that method.

    • Hi Pauline, I definately agree with you that this can work!

      I actually work very similar to yourself in that as soon as I get paid I sent money to my mortgage, money to bills and I know whatever is left over is mine to spend however I see fit. It doesn’t matter if I spend slightly more than expected on entertainment if my dining out expenses are lower than planned, as long as at the end of the day I meet my saving and debt goals.

      The reason I recommend planning for these expenses individually when starting to budget is it makes things easier to track and determine any areas where we are leaking cash. With experience we can become a bit more lax about things as long as the overall numbers balance.

  3. We use a similar approach to our budget. Our income is the same every month, so any extra that comes in (bonuses) isn’t put in the budget and is saved. We have fixed expenses such as rent, YMCA membership, etc that stay the same every month. We’ve actually added savings into this category. Next are variable expenses such as bills that my change each month (we budget high in order to make sure to cover these. Any extra is left for cushion.) and lastly are pliable expenses-gasoline and food. I call them pliable because some months we can really cut these down if we need to. We’re a one income family, so a budget is an absolute necessity.

    • Financial Independence says:

      Not considering extra income such as bonuses when developing your budget is a great way to ‘find’ savings – if you haven’t budgeted for the income, you won’t miss it when it comes in and is sent straight to savings. It sounds like you’ve got a smart system worked out which allows for some flexibility – keep up the good work!

  4. Troy says:

    Awesome post. When it comes to creating wealth, we definitely have to control our expenses. And the best way to do that is to have a plan – a budget.

  5. Ben says:

    With websites like mint.com making it so easy to keep a budget, I can’t think of a good reason why not to keep a budget. A budget is both a bird’s eye view and a daily log that allows you to maintain control over your finances. If you don’t stay on top of your money, it’ll certainly stay on top of you!

    I’m personally a big fan of keeping a budget in an Excel spreadsheet. It’s a bit more time consuming but the rewards of sitting down and inputting all my expenses are pretty great. It hurts a lot more writing down a $50 dinner than I imagine seeing it pop up on a budget software would!

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