How to Make a Budget

Guide Note: Making a budget is a great way to keep track of your finances and calculate exactly how much money you are making and spending each month. Follow the steps in this guide for instructions on How to Make a Budget.

Table of Contents:

Introduction

  • The first thing that any good financial expert will advise you to do when setting out on the path to savings is to make a budget. An accurate budget will allow you to identify all of your necessary expenses, which in turn will give you the ability to calculate exactly how much you can afford to set aside for savings. While every person's budget will inevitably be different, there are some basic guidelines that everyone should follow when setting up their budget. Here are some simple steps for setting up your budget:

Step 1: Decide on a Time Frame

Where does all the money go? (Creative Commons photo by Elle Chyun)
Where does all the money go? (Creative Commons photo by Elle Chyun)
  • Before you start your budget, you will need to decide on the time frame that you will use. Is yours going to be a monthly budget, a quarterly budget or a yearly budget? The most popular time frame is usually monthly (due to the fact that most bills come once a month), so that is what we'll use for this exercise.
    1. Since some expenses only come around once a year (such as holiday spending, tuition payments, etc.) a yearly budget can sometimes better reflect your overall expenses.
    2. If you choose a monthly plan, pick one day each month (Sundays are often good) to go over your finances, pay your bills, and adjust your budget according to any changes in spending or income.

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Step 2: Calculate Your Income

  • The first thing that you'll need to do when coming up with your budget is to figure out exactly how much income you have coming in. This should include your monthly salary (after taxes) and any supplemental income you may have coming in (from additional jobs, investments or other income sources). If you are in a salaried position, simply divide your yearly income by 12.
    1. If any of your income sources vary widely from month to month (such as income from freelance work, commissions or bonuses), try to figure out a monthly average by calculating how much you made last year from these sources and dividing by 12.
    2. Other income sources (besides your work salary) can include Social Security or pension payments, child support, unemployment checks and investments.
    3. You may need to look over the previous year's tax records in order to calculate your after tax income.

Step 3: Calculate Your Expenses

  • Here is where things get interesting. Now that you've calculated how much money you have coming in each month, you'll need to figure out exactly how much you spend during the same period. While some expenses remain constant and are easy to figure out (Rent, Car Insurance, Car Payments, Phone & Cable Bills), others are not so easy to pin down. Expenses such as utilities, gas, food and entertainment may change from month to month, so the best way to figure them into your budget is to come up with a monthly average for each one. Over a three month period, keep a record of how much you spend on each of these things and then figure out, on average, how much you're spending each month. Add up all of these things to come up with a monthly total of your expenses. Use this handy spending worksheet to keep track of your expenses.
    1. Break your expense report down into different categories (Housing, Food, Insurance, Utilities, Entertainment, etc.) so that you have a better picture of where your money is going each month.
    2. Make sure to calculate in any interest that you may be paying as a result of finance plans, credit cards or loans. If you don't, you'll have an inaccurate budget.
    3. Take special note of any non-essential spending that you may be doing (Entertainment, Travel, Gifts) so that you can identify where you may want to make cuts in your spending.
Figure 1: Make yourself a budget (Creative Commons photo by Jamin Gray)
Figure 1: Make yourself a budget (Creative Commons photo by Jamin Gray)

Step 4: Calculate the Surplus

  • Now that you've figured out your monthly Income and Expenses, you can start to determine how much you have left over for savings. Simply subtract your monthly expenses from your monthly income to find out how much surplus money you have coming in each month. Fill in the figures on this budgeting worksheet to calculate the surplus. While you don't need to put aside this exact amount for saving each month, this figure can help give you a rough idea of how much you can afford to save.
    1. If your monthly expenses turn out to be larger than your income, then it may be a good time to figure out ways to reduce your expenses and keep your spending more in line with your income.
    2. While many financial experts suggest that your expenses should work out to 60% of your total income, the reality is that for most families and individuals, this is not the case. Try to make this a goal, but don't stress out if you can't reach it right away.
    3. Just because you have a surplus, doesn't mean it's time to rush out and buy the newest iPod. Figuring out your surplus income is the perfect opportunity to initiate a good savings plan. For more information, see Mahalo's guide to How to Save Money.

Step 5: Keep Good Records

  • While writing out your budget on piece of scrap paper once every year or so may seem like the easiest way to go, it is wiser to keep a continuing record of your expenses, income and savings somewhere that is permanent and can be easily updated. While software programs such as Quicken, Microsoft Money and online money management services such as Mint.com can make it easy for you to manage your personal finances on the computer, something as simple as a personal ledger or notebook can be just as effective for keeping tabs of your budget.
    1. Pick a time each month to organize your finances, write down of record of your income and expenses for the month, and update your budget.
    2. While you don't need to keep receipts for every single purchase you make, try to at least keep ones from purchases over $20.
    3. Keeping good records will allow you to adjust your budget over time to better reflect your financial situation. In general, the more accurate your budget becomes, the easier it will be to manage your money.

Conclusion

  • The heart of any good financial plan is a comprehensive, thorough and accurate budget. Not only can it help you keep track of where your money goes each month, it can also help let you know how much money you can afford to set aside for a rainy day. You don't have to be an accountant in order to put together a successful budget. All you need is a little time and a desire to be responsible with your finances. But the most important thing to remember is that your budget won't work unless you stick to it. So get your calculator out and start budgeting!

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