By Saver | June 15, 2008
When Spender and I started to discuss the idea of a budget, we ran into a little bit of a chicken-and-the-egg problem. It’s hard to create a budget when you’re not sure how much you spend or need to spend in certain categories. At the same time, a budget needs to say more about how much you should be spending rather than how much you are spending. In the end, we decided to create a budget even before we tracked a full month of data.
With those thoughts in mind, here are a few easy steps to create a budget:
Step 1: Start tracking every expense. This is the most important part of having a budget — it’s also the hardest to implement. Find a way that works, and start today. We’re using google spreadsheets. You can also try your own spreadsheet, Pear Budget (an online system) or something like Microsoft Money or Quicken.
Step 2: First, take a look at your last couple of paychecks and write down your monthly income. Even if you get paid every two weeks, use twice your paycheck. This the amount coming in most months, and when you get a 3 paycheck month, it’ll be like a little bonus. Much more fun than trying to figure out calculate 13/12 of your paycheck and budgeting to the very last cent.
Step 3: Write down all your fixed expenses: rent, car payment, cell phone bills, loan/debt payments. Anything for which you pay the same amount each month. You can also include things you pay once or twice a year or quarterly (like car insurance), but just divide to get a monthly amount. Do a quick check: ideally this amount is in the 50-60% (or less!) range. If it’s much more, you probably want to work on reducing come of these expenses.
Step 4: Pay your self first! Set aside as much as you can each month. Start with an emergency fund in a savings account, but then move into Roth IRAs and other investments. A good goal is at least 10% of your income. Again, if it seems like you can swing this, then try to figure out what you can trim from the expenses in step 3.
Step 5: Take what’s left of your income after you subtract your fixed expenses and your savings, and divide it up into your spending categories. Save some for irregular expenses, like health care expenses or birthday gifts. You can call this category “other”. Be as honest as you can, because you want to create a budget/spending plan that is reasonably reflective of your lifestyle, but stay within the amount you have to spend.
Step 6: After a month of tracking your spending (see step 1), compare it to your budget. Where the two don’t match, adjust your budget by moving money from one category to another (just don’t touch your savings!), or focus on adjusting your spending on that category for the next month.
Step 7: Repeat step 6! Every month, compare your actual spending to your budget. Adjust both as necessary — see where to focus your attention on your spending, and see which budget categories you can reduce in order to save more or pay off debt faster.
It’s that simple. We have created our budget, and we are tracking our expenses this month to see if we can make it. The first month is mostly about understanding where we are spending our money, but our budget will give us a good clue if we are way out of line anywhere.