How To Make A Budget

It's very important that you make a realistic budget when you want to keep your spending under control as it allows you to see the flow of your money -- the amount coming in and where it goes out. With this crucial information in hand, you can make more intelligent decisions about how to spend your money.

Track Your Expenses

The first step in making a realistic budget is figuring out where your money goes. To keep track, you should make an expense record. Rather than relying on a computer program, it is actually best to keep track of your expenses in an extremely old-fashioned but comprehensive way: paper and a pen. Here's how:

Record all of your expenses for two months. By doing this, you'll avoid creating a budget based on a week or a month of unusually high or low expenses.

Select a Sunday to begin recording your expenses.

Record that Sunday's date in the blank at the top of one sheet of paper.

Carry that sheet with you at all times.

Record every expense you pay for by cash or cash equivalent -- check, ATM or debit card or automatic bank withdrawal. Don't record credit card charges, as your goal is to get a picture of where your cash goes. When you make a payment on a credit card bill, however, list the items paid for.

At the end of the week, put away the sheet and take out another. Repeat this process for the remaining weeks.

At the end of the eight weeks, list seasonal, annual, semi-annual or quarterly expenses you incur but did not pay during your two-month recording period. These could include property taxes, car registration, magazine subscriptions, tax preparation fees, insurance payments, and seasonal expenses such as holiday gifts.

Total Your Income

Your expenditures account for only half of the picture. You also need to add up your monthly income.

On a blank sheet of paper, list the jobs for which you receive a salary or wages. Then, list all self-employment for which you receive income, including farm income and sales commissions. Finally, list other sources of income, such as the following: bonus pay,dividends and interest, alimony or child support, public assistance, pension or retirement income.

Beside each source of income, list the net (after deductions) amount you receive each pay period. If you don't receive the same amount each period, average the last 12.

Beside each net amount, enter the period covered by the payment -- such as weekly, twice monthly (24 times a year), every other week (26 times a year), monthly, quarterly or annually.

Finally, multiply or divide the pay period into the net amount to determine the monthly amount. For example, if you are paid twice a month, multiply the net amount by two. If you are paid every other week, multiply the amount by 26 (for the annual amount) and divide by 12. (The shortcut is to multiply by 2.167.)

When you total up all the amounts, this is your total average monthly income.

Make Your Budget

After you've kept track of your expenses and income for a couple of months, you're ready to create a budget. Your twin goals in making a budget are to control your impulses to overspend and to help you start saving money. Follow these steps:

On a piece of paper, write down categories into which your expenses fall. Total up your two months' (or estimated seasonal, annual, semi-annual or quarterly) expenses for the categories you create.

On a second piece of paper, list your categories of expenses down the left side of the page. Use as many sheets as you need to list all categories. These are your budget sheets.

On the sheets containing your list of categories, make 13 columns. Label the first one "projected" and the remaining 12 with the months of the year. Unless today is the first of the month, start with next month.

Using your total actual expenses for the two months you tracked and your estimated seasonal, annual, semi-annual or quarterly expenses, project your monthly expenses for the categories you've listed. To find your projected monthly expenses, divide your actual two months' expenses by two, divide your total seasonal or annual expenses by 12, divide your semi-annual expenses by six and divide your quarterly expenses by four.

After you've divided up your seasonal or annual expenses, you might want to include only the major expenses -- such as quarterly loan payments or tax bills -- in your monthly budget projections. Just make a note of when smaller expenses, such as magazine subscriptions, are due so you can adjust your budget for that month. These temporary adjustments make more sense than trying to save a small amount each month so you can pay for your magazine subscription once a year.

Enter your projected monthly expenses into the "projected" column of your budget sheets.

Add up all projected monthly expenses and enter the total into a "Total Expenses" category at the bottom of the projected column.

Enter your projected monthly income below your total projected expenses. Figure out the difference.

Should your expenses exceed your income, you will have to either cut expenses or increase your income. One way to do this is to earn more money -- but it's not always likely you'll get a substantial raise, find a new (higher-paying) job, work a second job or make a great deal of money from selling off your assets. This means you must decrease your expenses without depriving yourself of items or services you truly need. Review your expenses with any eye toward reducing. Rather than looking to cut out categories completely, look for categories you can comfortably reduce slightly.

For example, let's say you need to cut $175 from your budget. You had also planned on spending $75 a month to eat out dinner, but are willing to decrease that to $25, thereby saving $50. Keep looking for categories in which you can make similar, small adjustments.

Staying on Track

Use your budget as a guide and know that it is not always going to be possible to be exact on these budget amounts. If you constantly overspend in one area, you'll need to change the projected amount for that category -- without berating yourself. Keep in mind that a budget is designed to help you recognize what you can afford; it's not just an exercise in filling in the "correct" numbers.

Check your figures periodically to keep an eye on how you're doing. If you never have enough money to make ends meet -- you're using credit cards and not paying the balance in full each month -- it's time to adjust some more.

If you continually come up short, you may need to consider some larger changes. For example, you might sell your newer car for an older used car to free yourself from car payments. As you make adjustments to your budget, give careful thought to your priorities. Everyone has different ideas about what luxury is, and different feelings about what they're willing to give up and what they just can't live without. Think about what you value, and be honest with yourself.

Use this list of suggested categories of expenses when compiling your budget: rent/mortgage, property taxes, insurance (renter's or home owner's), home owner's association dues, gas & electric, water & sewer, telephone, maintenance & repairs, cable TV, garbage, household supplies, housewares, furniture & appliances, cleaning, groceries, breakfast out, lunch out, dinner out, coffee/tea, snacks, clothing & accessories, laundry, dry cleaning & mending, toiletries & cosmetics, haircuts, massage, health club membership, donations, medications, vitamins, doctors, dentist, eye care, therapy, road service club, registration, gasoline, maintenance & repairs, car wash, parking & tolls, public transit & cabs, parking tickets, music, movies & video rentals, concerts, theater & ballet, museums, sporting events, hobbies & lessons, club dues or membership, film development, books, magazines & newspapers, software, supplies, photocopying, postage, bank & credit card fees, lawyers, accountants, holidays, birthdays & anniversaries, weddings & showers, pet grooming, ,vet, pet food, toys & supplies, tuition or loan payments, books & supplies, child care, clothing allowance, school expenses, toys & entertainment.

You may have to sacrifice some things that feel important to you, but don't expect to stick to your budget if you've taken away funds for almost everything beyond food, shelter and bills for your mundane necessities. Try making a list of things you feel you can't live without, and whittle your other expenses down to accommodate them. If you make room for at least some of the things you love most, you're much more likely to succeed at your plan.

Debt Handling - Developing A Budget Can Increase Income

It might seem that developing a budget should be an elementary task. But many people are simply not inclined to use spreadsheets, balance checkbooks or lay out a formal budget. Whether by nature, or as a result of a reaction to public school mathematics training, some people just aren't 'number people'.

But everyone will find it in their self-interest to make the effort to outline their expenses against income even if it requires getting someone else to help undertake the task. The budget should include monthly income and outgo, projections of expected increases and decreases and some buffer for the unexpected.

If you feel uncomfortable using spreadsheet software - which is available for free these days either through Open Office or Google Docs & Spreadsheets - at least jot down some figures on a legal-sized pad.

Divide the spreadsheet or page into two columns. In one, list income, in the other write down all monthly costs. In the costs column include all major regular bills, groceries, gasoline, etc. Then add at least 10% for unexpected expenses, if you can.

Now, for an important add-on task that too few undertake: project different scenarios. Make another budget (an imaginary one) that shows monthly costs, income and the difference between the two... except:

Exclude monthly credit card interest amounts. Exclude auto loan interest. Exclude 25% of any 'impulse buy' amounts. Then sum the total of those three.

These three represent the amount you could conceivably avoid paying every month. If the total is even as low as 10% of your monthly expenses (and for some it's higher), you are paying a substantial amount of your income to charges that could be avoided.

No one but you, being as realistic as possible, can decide whether that 10% overhead you pay is worth what you get in return - having certain items earlier than you would by saving for them. But, consider this: saving that 10% APR paid on $2,000 for one year is: $110. And many people pay only the minimum monthly payment, which amounts to much more. That's $110 you are paying solely to have something costing $2,000 a year earlier.

Only you can decide which is worth more to you, but developing a budget will help you make those decisions rationally.

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