If you want to keep your spending under control, it's essential that you make a budget. A budget allows you to get a handle on the flow of your money—how much you make and how much you spend. With that information in hand, you can make intelligent choices about what to buy with your hard-earned cash.
The first step in making a realistic budget is figuring out where your money goes. To keep track, make an expense record.
You can make the expense record using an app on your phone, on your computer, using a spreadsheet, or you can choose an old-school approach and use paper and a pen. (Read more about how to figure out your expenses.)
Your expenditures account for only half of the picture. You also need to add up your monthly income.
Again, on your phone, spreadsheet, or 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 gig income, sales commissions, and money you earn doing any side hustles. Finally, list other sources of income, such as:
Next to 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.
Next to 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 the net amount by the number of pay periods 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.
When you are done, total up all the amounts. This is your total average monthly income.
After you keep track of your expenses and income for a few months, you're ready to create a budget. Your goals in making a budget are to:
To create your budget, follow these steps:
Category |
Expense |
Home |
rent/mortgage, property taxes, homeowners' insurance, homeowners' association dues, telephone, gas and electric, water and sewer, cable, Internet service, garbage, household supplies, housewares, furniture and appliances, cleaning, yard or pool care, snow removal, maintenance and repairs |
Food |
groceries, breakfast out, lunch out, dinner out, coffee/tea, snacks |
Clothing |
clothes, shoes and accessories, laundry and dry cleaning |
Self Care |
toiletries and cosmetics, haircuts, massage, health club membership, donations |
Health Care |
insurance, medications, vitamins, doctors, dentist, eye care, therapy |
Transportation |
car payments, insurance, road service club, registration, gasoline, maintenance and repairs, parking and tolls, public transit, cabs, parking tickets |
Entertainment |
music, movies, concerts, theater, ballet, museums, sporting events, hobbies and lessons, club dues or membership, books, newspapers, software and games |
Dependent Care |
child care, clothing, allowance, school expenses, toys and entertainment |
Pet Care |
grooming, vet, food, toys and supplies |
Education |
tuition or loan payments, books and supplies |
Personal Business |
supplies, postage, bank and credit card fees, legal fees, accounting fees |
Travel |
family trips, vacations |
Gifts & Cards |
birthdays, holidays, anniversaries |
Taxes |
deductions, credits, penalties |
Insurance |
life insurance, car insurance, home insurance, pet insurance |
Savings & Investments |
stocks, bonds, 401k, saving accounts, CDs |
If your expenses exceed your income, you will have to cut expenses or increase your income. If finding more income is not realistic, focus on decreasing your expenses. The trick is doing this without depriving yourself of items or services you truly need.
Reduce the amount you spend in each category. Review your expenses and look for categories you can comfortably reduce slightly. For example, let's say you need to cut $175 from your budget. You had planned on spending $200 a month on meals at restaurants, but are willing to decrease that to $150, thereby saving $50.
Preserve things you cannot live without. Make a list of things you feel you can't live without, and whittle down your other expenses to accommodate them. For example, you might decide to work out at home rather than at a gym because you know you'd go nuts if you couldn't eat out with friends weekly. If you make room for at least some of the things you love most, you're much more likely to succeed at your plan.
Don't think of your budget as etched in stone. If you do, and you spend more on an item than you've budgeted, you'll get frustrated and be more likely to scrap the budget altogether.
Review your budget and make adjustments. Check your figures periodically. If you never have enough money to make ends meet, it's time to adjust some more. Or, if you constantly overspend in one area, change the projected amount for that category and trim the money from another category.
Consider larger financial changes. If you continually come up short, you might 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. Think about what you value, and be honest with yourself.
Be willing to sacrifice. You might have to sacrifice some things that feel important to you. But don't expect to stick to your budget if you take away all but the essentials. Be realistic.
Solve Your Money Troubles: Strategies to Get Out of Debt and Stay That Way, by Amy Loftsgordon and Cara O'Neill (Nolo), is a comprehensive guide to getting back on your financial feet. It provides sample budget sheets, information on how to negotiate with creditors and deal with debt collectors, and more.
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