Budgeting is the process of creating a plan for how to spend the money you earn. Your final, written spending and saving plan is called a budget. By taking the time to create a budget, you’ll have a better understanding of how much money you actually have to do the things you need to do, or would like to do. A well-balanced budget will help you make sure you don’t overspend, help you make financial decisions with confidence, and help you worry less about your future financial security.
Making a budget can help you set spending limits, live within your means, manage and ultimately get rid of your debts, reduce living costs, and have more money for what’s important to you and your family.
Record your total income
The first step in creating a budget is having an accurate idea of how much money your household has coming in. Your final take-home pay (after taxes) is called your net income. If you have more than one income earner in the household, add up your net income to get your total net income—this is the number you should be working with when you create your household budget.
Keep tabs on your spending
Before creating your budget plan, you need a solid idea of where your money is going right now. For a few months, keep track of and categorize your spending. List all your fixed expenses—your regular monthly bills, like mortgage payments, utilities, and car payments, for example. These are expenses you’re unlikely to trim in a budget. Next, list all your expenses that are variable—things such as groceries, going out, and shopping. These are expenses you may be able to trim in your final budget.
Decide what your goals are
What are your long-term and short-term financial goals? To pay off credit cards? Save for retirement? Save for a vacation? Make a list of them all. By understanding your financial goals, you’ll better be able to decide how to change your spending habits to achieve those goals.
Create your plan
With your total net income and a record of your monthly expenses at hand, you’ll be able to see if and where you might have money left over at the end of the month. And you should be able to fairly accurately predict what you’ll have to budget for in the coming months. Your fixed expenses will likely remain as they are, but what you set aside for your variable expenses can change depending on your goals. Decide where you can spend less to save more. Decide where you want to limit your spending so you can achieve one of your goals. Shift your spending however you need to in order to make the numbers add up. If they won’t add up no matter what you trim, you may need to see if there’s a “fixed expense” you can either do without or change, or find ways to boost your income.
Stick to it
Here’s the hard part. Exercise your self-control and will power to stick to the new numbers! Limit your spending to what’s in your budget, keep receipts and bills, and compare your budget to what you spend every month. Consider your budget a fluid document—as the months go by, review your budget and make further adjustments to your spending as you realize you can, or as your situation changes. Evaluate whether your new spending habits are helping you achieve the goals you set out.