How to Build a Budget

Provided by The Balance

Have you ever devoted time to working out a financial budget? Do you know exactly how much you are spending each month? If you face financial hardship, would you have enough in savings to handle the burden? Preparing a budget may seem difficult and time-consuming, but the benefits far outweigh the effort.

Gather Every Financial Statement You Can

This includes bank statements, investment accounts, recent utility bills, and any information regarding a source of income or expense. One of the keys in the budget-making process is to create a monthly average, so the more information you can dig up the better.

Record All of Your Sources of Income

If you are self-employed or have any outside sources of income, be sure to record these as well. If your income is in the form of a regular paycheck where taxes are automatically deducted, then using the net income (or take-home pay) amount is fine. Record this total income as a monthly amount.

Create a List of Monthly Expenses

Write down a list of all the expected expenses you plan on incurring over the course of a month. This includes mortgage payments, car payments, auto insurance, groceries, utilities, entertainment, dry cleaning, student loans, retirement or college savings — essentially everything you spend money on.

Break Expenses Into Fixed Or Variable

Fixed expenses are those that stay relatively the same each month and are required parts of your way of living. They included expenses such as your mortgage or rent, car payments, cable and/or internet service, trash pickup, credit card payments, and so on. These expenses, for the most part, are essential yet not likely to change in the budget.

Variable expenses are the type that will change from month to month and include items such as groceries, gasoline, entertainment, eating out, and gifts, to name a few. This category will be important when making adjustments.

Total Your Monthly Income and Expenses

If your end result shows more income than expenses, you are off to a good start. This means you can prioritize this excess to areas of your budget such as retirement savings or paying more on credit card balances to eliminate that debt faster. If you are showing a higher expense column than income, it means some changes will have to be made.

Make Adjustments

If you have accurately identified and listed all of your expenses, the ultimate goal would be to have your income and expense columns to be equal. This means all of your income is accounted for and budgeted for a specific expense or savings goal.

If you’re in a situation where expenses are higher than income, you should look at your variable expenses to find areas to cut. For example, get rid of a gym membership or cut back on eating out as often.

Review Your Budget Often

It’s important to review your budget regularly to ensure you’re staying on track. After the first month take a minute to sit down and compare the actual expenses versus what you had created in the budget. This will show you where you did well and where you may need to improve.