How To Make A Budget That Works In 4 Simple Steps
If there is one aspect of personal finance that most people struggle with, then it is creating a feasible budget and sticking to it. Often the problem is that you have not been entirely honest with yourself while making the budget. This means that you do not have a realistic plan for your spending. However, there are a number of steps that can be taken to ensure that the budget you devise will really work.
Steps 1: Record All Income And Expenses
The first step on how to make a budget that works is to carefully record every single transaction you make over a set period of time – a month probably makes the most sense. Carry a notebook with you to record all expenses and save all of your receipts. It is important to record and track every single penny.
Be specific in recording your spending. Rather than recording how much you spent in a particular store, you must note what you actually bought. This is especially important if you buy items from multiple categories. One example might be that you have spent $50 in a department store which needs to be split between food and new household appliance.
A great way to track such expenses is to use spreadsheets. You will be surprised at how much money you are wasting every month. Seeing it all in black and white can help you to figure out where you are overspending. For example, do you really need to spend $250 on eating out?
Steps 2: Record Your Income And Necessary Expenses
Once you have an idea of your spending habits it is time to get down to the business of agreeing on your budget. The first step is to write down the net income brought into your household each month. You should then write down essential expenses that are paid every month. This will include things like rent, credit card payments, loan repayments, insurance and other regular payments. Your tracked spending from the previous month should help identify these.
Once you have the amounts of your regular monthly payments, you need to subtract them from your income. This gives a total amount for you to work with for your other expenses such as groceries and transport.
Step 3: Make Necessary Adjustments
If you find that your income is greater than your expenses, then you are in a great position. You can begin to put a little into a savings plan for the future. However, if like most people you find that your expenses exceed your income then it is time to make some adjustments.
There will be some obvious place to save money, like the large eating out bill noted earlier. There will also be plenty of other places that you can trim a little off of your spending. Groceries are one of the main areas that people overspend on. However, it is important to be realistic. It will not be possible to drop from spending $300 on groceries to just $100.
Step 4: Stick To Your Plan – But Be Flexible
Once you have created your budget it is important that you follow it. This is by no means easy, and there will be times when you screw up. However, if you remain focused on your budget you will continue to move closer to your financial goal. It is important to have a little flexibility in your budget. At times there will be unexpected expenses or the cost of things such as fuel rise. This means that from time to time you will need to adjust your budget.
The key to a successful budget that really works is to be realistic in setting your budget figures. It is also important to make sure that you are willing to stick to it as much as possible. However, it is not set in stone and there is a little flexibility. If the budget is not working out then you can revisit it and make some changes.
Getting Started…
Now that we’ve covered the basic 4 steps to making a budget that works below is a simple calculator that you can use to help you get started.
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Bio:
Hugh Tyzack is the founder and managing director of loansforbad-credit.co.uk, a company which provides loans including logbook loans to individuals who have bad credit. More details are available on his website or you can follow him on Twitter @badcreditloans8 and also on Google+. When he is not working, Hugh listens to music and plays the piano.
Making the necessary monthly adjustments seems to be the key to keeping a quality, effective budget. The first budget you put together is like the initial draft of a paper you write in college. You need to review and rewrite until it is just right.
Great post, Hugh. Following the above steps has been absolutely life-changing for our finances. It’s allowed us to cut our grocery and entertainment costs by more than half, and our gasoline costs by a good 30%, giving us more money to put towards debt. Crucial wealth-building stuff here!!
Budgeting to some is a tedious task but it really doesn’t have to be. You bring up all good points about budgeting and I’ve mentioned them all myself. I think once someone gets on track with their budget and makes it part of their every week finance update they will get used to it. In our house it’s a normal weekly routine that we factor in some time to do and it’s the best thing we’ve every spent our time on. Cheers
Good point FMM. Your first budget will never be perfect in fact I find myself adjusting my budget almost every month. Thanks for stopping by.
I agree with you there Laurie. Ever since we’ve started keeping a budget I’ve been able to spot leaks and overspending issues a lot quicker. I also feel with a budget it gives us more financial control and helps me sleep better at night knowing my finances are in good shape.
Great point Mr. CBB. That’s one thing I’ve been very diligent about is taking a half hour out of my entire week to review and update my budget. I also try to make it a point to review it with my spouse so that we are on the same page all the time.
Great tips Hugh! We’ve budgeted for years and love it, but know that it’s not for everyone. I think a big part of it comes down to being flexible and understanding that things do happen. Having a budget is probably what has helped us the most in terms of being disciplined with our money.
Totally agree John, I use to be against doing a budget for years due to the fact I could never keep on top of it. Now that I use Mint it helps me out a lot, but even at that you still need to be disciplined to keep it going.
Great post! Love the tips – I’ve always been pretty frugal, conserving my cash with an iron fist. It’s hard, but it’s worth it! Keep up the good work on your blog.
Ever since I started out working, I make it a point to track every expense I incur every month so that effective budgeting can come into play. With automation by using spreadsheets, it’s very interesting and easy to track not only your expenses but also your portfolio.
Thanks Troy, I really appreciate that. Keeping a budget really is tough. It took me a lot of times to get it right and find a solution that worked well for me but I feel as long as you find what works for you and stick to it you’ll be far better off than anyone who does have a budget.
I definitely have problems with sticking to my budget and flexibility. Many times I use flexibility to screw the budget up. It is not easy at all to use budget correctly. Easy to make it, difficult to follow.
I agree Martin things can change a lot from month to month, I find the best way to handle it is by making small adjustments at the beginning of each month and see how things look at the end of the month. For example, if I find that I’ve been consistently over spending in on category I either need to cut something out of it to spend less or increase my budget for a given item. One area I see this happen a lot is with grocery’s. Buying food can always vary from month to month depending on what you eat, but the important part is to set a budget and see what happens, it’s the only way you will truly know if you are on track. Thanks for stopping by.