How to Make a Budget
Where do I start?
There are many different ways to make a budget. You can use a simple notebook, excel spreadsheets, or a software program. What you choose depends on how much you want to spend, how detailed you are, and how easy you want it to be.
If you use a notebook, you will save money, but it will take longer to design it and keep it up. Also, it’s harder to keep track of everything and fix possible mistakes.
Excel is a great tool to use for creating a budget. You can design it yourself or use a pre-made template. Here you can find several different types of budgets to choose from. You can now sign up for Quicken online for free.
If you want it to be even easier you can purchase a software program such as Quicken or Microsoft Money. Learn more about budgeting software here.
The Basics of Budgeting
The basic idea of a budget is that you are figuring out your cash flows. You have both cash inflows and cash outflows. Cash inflows include all the money you make including wages, tips, dividends, interest, and any other income.
Your cash outflows are all of your expenses including rent or mortgage payments, cable, electricity, telephone, food, clothes, gas, etc. Your net cash flows equals your cash inflows minus your cash outflows.
For example, let’s say you make $2,000 a month from your job and $100 a month in interest and dividends from your investments. Your cash inflows would equal $2,100.
If you pay $700 per month on rent, $200 for electricity, water, telephone, and internet, $250 for groceries, $400 for recreation, and $200 for gas and related car expenses, you cash outflows are $1,750 per month. This means that your net cash flows for each month equals $2,100 – $1,750 = $350.
This $350, the net cash flows, is all the extra money you have each month. It can be used to save, invest, or for something else.
What are you trying to accomplish with a budget?
Usually you begin a budget because you are trying to save money. Maybe you’re saving for a car, house, or vacation, or maybe you’re trying to get out of debt.
If your net cash flows is a negative number, you are going into debt. At this point, you need to go through your inflows and outflows and see what you can change. You need to be able to account for all of your money.
If you are regularly investing and saving money but you feel like you aren’t in control of your money, budgeting will help. You may find that you are able to save and invest even more money with an effective budget.
Adjust Your Cash Flows
Whether you need to turn a negative net cash flows to a positive net cash flows or you just want to increase it, you need to examine your inflows and outflows.
Can you increase your inflows? This is usually harder for most people. You probably have a job where you get a set amount of money. If you are in need of money, you could work overtime, get a part-time job, or start a side business.
Can you decrease your outflows? This is usually much easier than increasing your inflows. First look at your basic expenses. Do you watch a lot of television? You might be able to cut down your cable bill. Do you have a high electric or water bill? Try to be more conscious of how you use electricity and water.
Then move on to your other expenses. You’d be surprised where you can save money. Most people will find that they spend way more on food, clothes, and recreation than necessary. Simple steps can help you cut back such as taking less unnecessary trips to save on gas, making your own coffee each morning instead of buying it, or buying store brands instead of name brands and using coupons.
Make Goals
Once you feel you have your expenses under control, you need to make financial goals. These may include paying off credit card debt or other debt, saving for a car or a down payment on a house, or starting a retirement fund. Each of these goals are very important it it’s a great idea to make a plan for each.
Look at your net cash flows and decide how you will use it. For example, if you have $600 in net cash flows every month you might decide to spend the first 8 months paying off all your credit card debt. I recommend paying off all debt, except for a mortgage, before you begin saving for anything.
After you’ve paid off all your debt, you could put $200 per month towards a down payment on a house, and you could put the other $400 in investments to start saving for retirement.
Stick to Your Budget!
A budget will do nothing for you if you don’t stick with it. If you find you are cheating too much and not following it, reexamine your budget to see if it is attainable. If you don’t have enough budgeted to cover all your expenses, adjust it as necessary. There is no point in making a budget you can’t stick with.
If you find yourself constantly readjusting your budget to the point where you’re back where you were with no savings, you need to examine your spending habits and self control. Sticking to a budget won’t be easy, but if you have a problem with controlling your spending, you should get help.
Follow up on Yourself
Every month you need to look at how you did. Did you spend more or less than you planned? Was there an unreasonable goal? Constantly adjusting and changing goals is not a bad thing. You want to create your ideal budget. You situation might change such as getting a raise or new job, or buying a house. By following up and adjusting you can keep everything in line.
Budgeting money with a household budget can help anyone with their money. You might realize that you’ve been living in an apartment or driving a car that you really can’t afford. By learning how to make a budget, you are on your way to less stress from sound money decisions.