Are you intimidated with the thoughts of making a personal budget. Don’t be. Making a budget isn’t really all that difficult. And the good news is, you can’t really make a mistake. That’s because:
- There is no right or wrong budget. Every person’s budget is different since it will be based on their needs.
- You learn as you go. The budget process includes a step to revisit and adjust. Lessons learned along the way only add to your success.
The budgeting process in our free ebook, How To Budget Your Way Out of Money Problems, is based on a six step process. Take each step, one at a time. The trick is to start from where you are today (even if it’s not a pretty picture) then build a budget based on small, identifiable change you think you can make.
Here is our six step plan to building a successful budget:
Step 1: Set Your Goals
You need a reason to make changes in how you manage your money. Create specific, realistic goals that address your money problems. Write them down so you stay focused on what you want to achieve.
Step 2: List Your Income And Expenses
The best place to start building your budget is to fully understand how you are spending your money now.
Make a list of everything you earn, spend, pay and save today; NOT what you want to do. Be prepared, it might not be a pretty picture. Chances are pretty good you are going to find out you are spending more than you earn. That’s OK. You will look for ways to deal with this in your next steps. By putting everything on the table now, you will develop a list of action plans in Step 4 to build new habits for your future.
You should plan to spend at least a month exploring your past spending habits. The more history you have, the more accurate your projections will be.
Step 3: Analyze Your Expenses
Pull everything you have gathered in Step 2 into one simple statement of your current monthly cash flow. You can use any spreadsheet or on-line budgeting program. To get started, download our excel personal budget worksheet.
Make a list of all your expense items and add up the monthly total you spend on each category. If you bought lunch for $10 five times and went to the grocery store twice and spent $120 each time, your total grocery spend was $290.
For items you don’t pay monthly (such as your property tax or car insurance) take the annual cost and divide it by 12 to get your estimated monthly expense. Do the same for other non-recurring expenses like Christmas and birthday gifts, back to school costs etc. Put in 1/12th of your estimated annual spending for these items.
Step 4: Set Your Budget
Here is where you create your budget. The objective is to structure your inflows and outflows so you can reach your financial goals. Your final budget should be based on how much you want to put away in savings each month, how fast you want to pay down debt, how much you think you can cut back.
For every expense reduction you find, write down anything you need to do or change to accomplish those savings. For example, if you are going to save $125 a month on your gym membership, you will probably need to provide written notice of your cancellation to the gym facility.
Don’t forget to include debt repayment and savings as part of your budget. If you want to pay off $10,000 in credit card debt in 2 years you will need to repay about $500 per month towards that debt.
Step 5: Manage Your Budget
A budget won’t help you keep your spending in check if you don’t keep track. There are a lot of online and mobile budgeting apps that can help or you can simply use a note taking system in your phone.
Step 6 – Revisit And Adjust
If you find yourself consistently unable to maintain your budget, then you need to revisit. Are your goals unrealistic? Realign your budget to make it work, but keep your overall financial goals in mind when doing so. Revisit your budget, and your goals, at least once a year. Priorities change, incomes grow or decline. Life isn’t cast in stone, your budget shouldn’t be either.
To help you build your budget, we’ve prepared a simple, printable tip sheet that outlines our six step plan to build a better budget. Get started on preparing your budget today.