How to Create a Budget

Three Methods:Budgeting HelpCreating Your BudgetSticking to Your Budget

Budgeting money is important for us to be able to meet our expenses whether in the home or business, manage our money, and keep our finances in check. We need to know where our money is going, and put away enough to pay for our monthly bills. It is important for every bit of our income be accounted for, so that we are aware of where we might be spending too much, and where we can cut back so that our most important expenses are covered at the end of the month.

Method 1
Creating Your Budget

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    Record the net monthly income that you receive. Net income is the amount that you actually get to take home, after all the deductions (taxes, health care) have been subtracted. Include other sources of income as well if applicable, such as tips, monthly bonuses, cost of living increases, dividends, interest income, etc.
    • What do you do if your income is constantly changing? You pretty much have to do things topsy-turvy.[1] Determine all your essential, priority and lifestyle expenses first. Then, with your paycheck, start paying off all your essential needs first, followed by your priority and then lifestyle expenses. The money you have left over can either be set aside for an emergency account or stashed away into savings.
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    Remove from your net monthly income your stated savings goal. Ideally, set up an automatic withdrawal into another account so that you aren't even tempted to touch it. If you never see it, you won't miss it. Squirreling away savings will help you anticipate emergency scenarios and prepare you for retirement.
    • How much money should you try to save? It mostly depends on your salary, but a good benchmark is 15% to 20%.[2] If you can only afford to save 10% of your annual income, that's fine, provided that you save some of it.
    • Take advantage of matching contributions from your employer, if possible. If your employer matches contributions to your 401(k) — up to a certain percent — take full advantage of their generosity. It's the closest thing you'll get to "free money" in your lifetime.
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    List down your monthly expenses into three separate categories. These categories are "fixed," "flexible," and "discretionary."
    • Fixed expenses remain the same each month, such as a mortgages or rent, a loan payment, insurance or medical premiums, etc. Total up all fixed expenses.
    • Flexible expenses include items that are necessary, but in which you can control the amount of money spent on, such as household and grocery items, clothing, utilities, etc. Total up all flexible expenses.
    • Discretionary expenses are items that are not necessary for survival. These could include expenses for recreation such as movies, travels, and impulse buys. If your expense to income ratio is out of balance and you are spending more money than you earn, items from this category should be eliminated or cut back. Total up all discretionary expenses.
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    Subtract the total amount of expenses from the total income for the month. If the expense total is less than the income total, then you are managing your finances well and should keep up with doing so. But if the expense total is greater than the income total, you are off-track financially and need to prioritize expenses.
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    If your budget is feeling pinched, take a look at flexible and discretionary expenses. Check your bank and credit statement to see what you spend money on, or sign up for a personal finance application online. This will help you track what you spend money on that's not absolutely essential.
    • Keep track of when you use credit cards. Did you know that people who use credit cards are more likely to spend more money than people who use cold, hard cash?[3] That's because cash "feels" more real, so it hurts more than credit. Try carrying only cash around and see if you spend less.
    • Look to see how much you spend on eating out, on your morning coffee from Starbucks, on watching movies in the cinema, and other costs you can cut back on. Many people need their Starbucks fix, even if there's a coffee machine at work. One cup of coffee per day, at $2.50 per cup, equals more than $900 per year! Think about what you could do with $900.
    • Begin to have the tough discussions about what you can cut back on or cut out altogether. Whether this conversation is made with a spouse or with yourself, try to be honest, forthright, and understanding. Nobody likes cutting back spending, even if it needs to be done.
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    Look at how much money you now have left from your income, after the expenses have been covered for. This is the only amount that is yours to spend if you aim to be debt-free. If you get paid weekly, make sure enough money is set aside to meet the monthly bills. Never borrow from the amount that should be used for monthly expenses. This reserve method will save you from living paycheck to paycheck.
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    Review the budget plan during the end of each income period, in order to ensure that you stay on track. Compare actual expenses against what you budgeted. If there are glaring variances, you might need to make adjustments on your discretionary expenses. As time passes, you may want to only perform this comparison on a quarterly basis.

Method 2
Sticking to Your Budget

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    Seek out technological help. If you're the old-school type who loves to balance their checkbook, more power to you! But know that emerging technology is making it easier than ever to track your expenses in real time, and with more sophisticated software., Quicken, and are all powerful online tools that will help you keep track of expenses and budget for the future.
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    Don't give it all up at the first sign of failure. Budgeting is like dieting. A lot of people start with majestic intentions. Then, when they fail to see results within two months, or when they start getting bored, they throw their hands up and quit, telling themselves it's not worth it. Don't give up before the battle has even started. Prepare yourself by acknowledging that budgets take a lot of time and a little effort.
    • Try to give yourself a full year of budgeting to determine whether it makes any difference in your finances. If, after a year of steady, scrupulous budgeting, it still hasn't made a dent in your savings or put a wad of cash in your pocket, feel free to re-evaluate. You won't be disappointed.
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    Start contributing to an emergency fund. No, an emergency fund is not the same thing as your savings fund. An emergency fund is 6 to 12 months' worth of living expenses, frittered away for — you guessed it — an emergency. What if you lose your job? What if your daughter needs to go to the hospital? A host of emergencies can potentially burn a hole in your pocket. Being prepared is the best step, and one that makes a difference in your budget.
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    Spend your tax refund wisely. A tax refund, if you're entitled to it, can be a huge windfall. Imagine getting a thousand, or two thousand dollars, without really expecting it. Knowing how to spend this potential windfall, however, can be pretty tricky, especially if you're barely above water. Think about contributing to your emergency or savings fund instead of spending it on a new flat-screen TV.
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    Pay off your debts slowly but surely. According to AARP, American households hold an average of $8,400 in debt.[4] That's a lot of cheese — a lot of cheese you owe somebody else. If you happen to pay off your debt each month with your income, that's great. But if you're like many other people, you might be struggling to pay off your debts each month, meaning that you have to attack things a little more strategically.
    • Which debts to you pay off first? High-interest debt or low interest-debt? Attacking low-interest debt and paying off certain debt lines altogether is called "snowballing." Attacking high-interest debt first is called "avalanching."[5]
    • If you're highly-motivated to pay off debts, go for avalanching. High-interest debts can gather up lots of compound interest fast, making this approach ultimately cheaper. If you need help motivating yourself, however, you might want to try snowballing, even if it means you'll pay more.


  • Try to cut down your expenses. Get rid of any unessential spending like eating out or expensive entertainment. Consider taking public transportation rather than owning a car. Clip coupons, buy generic products, and avoid impulse purchases. Above all, stop incurring new debt. Contemplate getting a debit card and cut up and cancel your credit cards.
  • Create a spending plan that permits you to diminish your debts. Catalogue your necessary expenses, such as housing, health care, and optional expenses, like entertainment and vacations.

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Categories: Budgeting