One of the main reasons that people don’t budget is because they don’t know how. Making a budget isn’t as difficult as you might think it is. It does take some time to figure out your income and expenses, but that work happens one time, at the start of your budget. Once you get your budget started, all you have to do is maintain it.
Step 1: Calculate Your Monthly Income
The first step in making a budget is to calculate your total monthly income. Add up your regular and reliable sources of income includes wages, salary, commission, tips, bonus, alimony, child support, etc.
If you have a primary stable source of income, avoid including irregular sources of income like gifts and income from hobbies. Since this money isn’t guaranteed, it’s not safe to base your budget on this money.
Step 2: Total Your Monthly Expenses
You’ll spend most of your time adding up your monthly expenses. Think of everything you must spend money on, for example, rent or mortgage, utilities, health insurance, groceries.
Step 3: Subtract Expenses From Income
Once you’ve written down all your expenses, subtract them from your income to come up with your net income. If your net income is a positive number, that’s great, you have some room in your budget to spend extra money.
However, if your net income is negative, there’s a problem. A negative net income is an early warning sign that you’re spending more money than you make. The only way to do this is to go into debt, something you can’t sustain for long.
Step 4: Adjust Your Budget
If your net income is negative, go back through your budget and cut back on some of your expenses to bring your net income back into the positive. Start with some of your “nice-to-have” expenses like gym memberships, entertainment, and toiletries. When that’s not enough, you may have to make some tough decisions. For example, you may have to reduce your cell phone plan for awhile until your income increases.
Step 5: Put Your Budget Into Action
Once you’ve created a budget on paper, it’s time to make it work. As you spend money throughout the month, continue to refer to your budget to make sure you’re spending what you planned to spend. Keep in mind that if you end up spending more for an expense than what you budgeted, you’ll have to spend less somewhere else.
It’s a good idea to track your actual expenses against your budgeted expenses so you can check your progress at the end of the month. If you see that you overspent in some areas, you may not have budgeted enough money for that expense. Or, it could be that you’re not practicing discipline when it comes to spending in that area.
Making Your Budget Work
Don’t expect your budget to work right away. It usually takes a few months to get your budget working just the way you want it to. Keep spending based on your budget and adjusting it as you need to.
