For many people, the thought of setting up a budget is daunting. It’s scary. It’s an unknown that will take time, energy and might possibly bring bad news.
But not having a budget, a roadmap for your personal finances, is possibly deadly to your financial future. You can’t get ahead if you don’t know where you’re going. You can’t get ahead if you don’t know where you’ve been.
Setting up a budget doesn’t have to be difficult or stressful. It does, however, require you to be honest in how you spend your money, be willing to make adjustments if necessary and have the desire to stick with the budget.
Although it’s not difficult to set up a budget, the end result must be this – your expenses must be less than your income. Sounds simple, but for many of us, it’s quite the opposite.
So, let’s get to setting up that budget. First, you must know how much you spend on things. If you haven’t been writing down how you spend you money, start do to that now. Keep track of every single penny you spend, so that when you set up your budget you’re able to be accurate in setting spending limits for each category.
Once you have a good idea of how much you spend in your various categories (which should happen after a month of recording expenses), begin to think about those categories. You’ll want budget categories for the obvious items like:
- Car payments and insurance
- Savings (include emergency funds, 401K and other savings categories here)
But you might also want to include additional categories, and you should add additional categories, as they fit your life. How many of these budget categories might work for you?
- Entertainment (include things like sporting events, movies, etc.)
Once you know what categories you need in your budget, it’s time to set the budget. Think about how much you spend in each category and set a monthly amount for that category’s monthly spending.
As you set spending for each category, be sure to provide an amount that is realistic, but frugal enough for you to reach your budget goals. Don’t be so frugal, however, that you immediately blow your budget the first week of the month.
After you set your spending categories, do last month’s budget. Go back through your checkbook, your credit card receipts and use your spending log, if you have one. Make sure you account for all your expenses.
Once you have input information for the previous month’s expenses, add up the income for last month and put that in your budget. Now add up all your expenses, and subtract that from your income. Do you have a positive number? If the number is negative, you are spending too much each month and now is the time to cut some budgetary fat before you set your “real” budget for this month.
