Having a budget is one of the most important financial decisions you can make. As Dave Ramsey says, you need to make your money work for you. Once you know how much money you have coming in each month and how you’re spending that money, you can start to overhaul your finances.
So, how to do go about setting up a budget?
First, you need to know that the perfect budget doesn’t happen overnight. It takes, on average, three months to get a budget right for you and your lifestyle.
1. Start tracking your spending. Consider tracking how much money you’re spending and where you’re spending it for a month or two before you sit down to hash out a budget.
2. Record all your sources of income. Make sure you include the amount after taxes. You want to know how much money you take home each month.
3. Collect ALL your monthly expenses. Enter the minimum payment you need to make for each expense. If you’re trying to pay off debt, I’m suggesting starting with the minimum payment on each credit card, student loan or car payment. You can increase payments after you know how much you HAVE to pay each month. Remember to budget for food, insurance, utilities, clothing, children’s needs, & holidays. If you spend money on it, you need to list it.
4. List expenses in terms of 2 categories-fixed and variable. Your fixed expenses are payments such as mortgage or rent, car loans, utilities, cable, insurance, etc. These expenses stay relatively the same each month. Your variable expenses are groceries, holiday spending, entertainment, etc. These are probably the items that will be the most flexible in your budget.
5. Total your expenses from your income and see what you have left. Hopefully, you have more income coming in than expenses going out. In this case you can add additional funds to a debt payment to get the snowball rolling. If you don’t have debt, start saving for college and/or retirement. If you have more expenses than income, it is time for a major change. You’ll need to make some hard decisions over the next several months on ways to cut spending or increase income.
6. Review your budget often. You’ll likely spend the first several months tweaking your budget. However, once your budget is set it will no longer need constant supervision. Check your budget on the first of each month to determine if your expenses are still accurate.
7. Be on the same page as your spouse. If you’re married, you both need to be part of the budget making process and in agreement on your financial goals.
8. Be realistic with your budget. You won’t succeed if you set an unrealistic budget. If you’re trying to cut spending, don’t take a $600 per month grocery bill and only allow yourself $200 per month. It won’t work and you’ll give up quickly.
Once you see where your money is going each month, you can more easily identify holes or wasteful spending. A budget forces you to see the reality of your financial situation and identifies aspects of your spending that you may not be aware of.
Starting a budget was a real eye-opener from me. It completely changed our lives. We got out of debt and learned to be better stewards of our money. If you’re not a person that would do well on a strict budget, consider having a financial plan. Knowing how much money you have coming in & going out can help you manage your money & make better financial decisions.
See my Blank Budget Form to use a a possible guide for establishing your budget
What are your tips for setting or keeping a budget?