If you've ever wondered how you'll pay the next bill or can't seem to find money to put into savings, then you need a budget.
A well-designed budget may take time to create, but once it's up and running, it shouldn't take long to maintain. You'll sleep better at night knowing you can comfortably cover all your expenses. Perhaps most shockingly, a reasonable budget allows for the occasional treat—without the guilt.
Step 1: Gather all your Financial Information
Collect your financial documents and receipts for three consecutive months--including all account statements, bills, pay stubs, and more. You can save all these documents over three months, or you might be able to access this information online, especially if you're a card user who rarely uses cash.
Step 2: Tally up your totals
Divide your documents into expenses and income. Then, list the corresponding numbers on a spreadsheet. As you work through these lists, include occasional and seasonal expenses (birthdays, anniversaries, holidays, etc.), dividing these expenditure groups by 12 to spread them evenly throughout the year.
When you have your numbers, look at how they match up. In the best-case scenario, your income will exceed your expenses. If the numbers are too close for comfort, or your costs outweigh your income, you'll need to trim your spending and/or look for ways to boost your income, so you don't end up in debt. You can also review your fixed expenses to see if there's any way to bring those values down, such as refinancing your mortgage to a lower rate, switching to a cheaper car insurance policy, or cutting out a monthly bill you don't need.
Step 3: List all your needs
Focus on your needs. Keep fixed costs (mortgage/rent, insurance, loans, etc.) listed first, and then add fluctuating payments (groceries, clothing, utilities, etc.) next to help keep things straightforward.
As you list each need, write down its corresponding cost. When you've finished creating this list, add up the total.
Step 4: List your Wants
Your next step will be all about the stuff you love to spend money on but can live without. Include entertainment costs: eating out, gifts, hobbies, and anything else that costs money but is not an absolute necessity.
Be sure to jot down the monthly cost of each item on your list and tally up the total.
Step 5: Assign dollar amounts to your expenses
You're now ready to do the nitty-gritty work of budgeting. Open up a new spreadsheet and copy your lists of expenses, starting with the fixed-cost needs, then your non-fixed-cost needs, and finally, your wants. Remember to include your occasional and seasonal fees here as well. Assign a fixed amount to each of these costs and plan to have that amount automatically transferred into a particular savings account. This way, when you need to meet that expense, you have the money on hand to cover the cost.
In the future, spend only the assigned amounts for each expense category.
Step 6: Review and adjust as necessary
Review your budget each month to see if you're staying on track. If you consistently overspend in a category, move some numbers around and spend less in another area, so you have more money available to meet your needs.
Final Thoughts
Remember that a budget should be freeing, not restrictive. If yours is not working for you, adjust and tweak it until you can stick to it easily. And, if you need more help, we have free budgeting tools to simplify the process.