Creating a Budget – How to Budget
Setting up a budget is one of the first steps that anyone need to take on the road to financial independence (Staying with it is another post altogether). If you haven’t set up a budget for yourself, now is a good time to do so. Creating a budget for yourself shouldn’t take long. It can be as simple as jotting down a list of your monthly expenses and income streams, although I would recommend something somewhat more permanent than a notepad. If you’ve never created a budget before or want to try a different approach I hope this “How to Budget” post will give you some good guidelines.
I use a spreadsheet for most of my budgeting. My preference is to list out all of my expenses and income in a single column. This first column is a model of what my budget will look like for that month. In the following illustration, you can see that I start with my expenses. In order to make this easier to read I’ve highlighted all the expenses in light red and checking account balances and income in green. For this example I’ve created a sample budget for someone earning $65,000 a year.
Towards the bottom, you’ll see pay 1 and pay 2 and right above that a balance in the account. I keep a “cushion” in my account since I never want the balance to go near zero. This amount ($250 in this case) represents that cushion. So in this budget you have a section with your monthly expenses and a section with an existing balance and monthly incomes. Note the sections are totaled and then tallied at the very bottom. The goal is to have your tally at the bottom be the same, or more then the starting balance.
You’ll also notice that I have highlighted several of the expense items with a bold cell outline. Those are items which have the budgeted money put into a particular “envelope”. Since I also I use an envelope budgeting system to track my funds. The envelope budgeting system augments the budget you create but doesn’t replace it. It helps with setting aside money for expenses. I’ll be posting an article on envelope budgeting soon.
Now would be a good time to scrutinize your spending and making some hard decisions. What are your priorities? Are you spending to much on groceries or “fun” time”? Can you save some money on insurance or on your cable bill by negotiating? Having it laid out on a spreadsheet makes it a lot easier to change numbers and instantly see the impact.
Once you have created a budget, you’ll want to track what you spend and whether you’re on track as the month progresses.
To do that I add a second column, which is a copy of the first and then make the appropriate changes to the expenses and income sections as needed. In the following illustration you’ll see that I added a second column identical to the first. Then I zeroed out or adjusted the items that have changed during the course of the month. I did the same for the Income section and still show a balance of $250.00. The checking account actually has $350 in it, which is fine, that only means that I haven’t spent (yet) $100 that will probably be spent in the second half of the month.
At the end of the month, I’ll add a third column, (see the Illustration to the left. By this time all of the expenses I have in the budget will have been spent or otherwise allocated, as will the income streams. The balance should be zero, and the amount in checking should be at my target “buffer” of $250, which it is. At this point what I would usually do after paying off my end of month bills is create a new spreadsheet for the next month. I keep a template spreadsheet that I use to make copies and as my budget changes I change the template. If your interested, you download a copy of this spreadsheet by clicking here: Sample Budget Template
If this post seems overly simplified, it was meant to be. I’ve kept the budgeting information here to the most basic elements. The target reader being someone who has never set up a budget before or has set one up and had limited success in following it. I’ve also avoided delving to deep into the line by line analyses of your spending habits, that’s something we can go into on a deeper level on another post.
There are dozens if not hundreds of budgeting techniques. I personally use a somewhat more complex version of this one and have been happy with it for a long time. If this method doesn’t appeal to you, search on line for free budgeting tools. there are cloud based budgeting tools that are absolutely free to use. But whatever method you choose stick to it and the best of luck to you in keeping to your budget.
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