Learn How to Build Business Credit

How to Create a Budget That Works

Budgeting! It’s a word that can strike fear in our hearts. For one thing, many people associate budgeting with not having much money. You have to stick to a budget to make sure you pay the bills. Budgeting can have associations of always buying generic paper towels, and doing without concerts, wine-tasting, or any other fun activities of choice.

But budgeting doesn’t have to be associated with deprivation. At it’s best, budgeting is a plan for clarity. You need to know where your money needs to go every month to pay the bills. Without clarity on that, you can fall behind. That impacts your quality of life, by leading to (potentially) calls from debt collectors and loss of a good credit rating.

Budgeting allows you to know how much you need. You need concerts and wine-tasting just as much as paying the electric bill. With a budget, you can plan for those events. You can plan for vacations. You can plan for a down payment on a house, or a new car.

Here’s how to create a budget that works, for all these things.

1. Monitor Your Expenses

One of the chief reasons budgets fail is that they are established without real knowledge of how much you spend and how much you need to spend.

So one key part of doing a budget is simply monitoring what you do spend. Put any thoughts of “that’s too much!” or “wait, do I need this?” aside for now. What you’re after is an honest tally of what you really spend, without censoring yourself.

For a month, monitor and track what you spend. On everything. You can use a notebook, a spreadsheet, or software like Mint.

Why? A budget won’t work if you don’t really know how much you spend. A budget plan can’t be based on lack of knowledge. Say you have never really tracked how much you spend on groceries. You might decide that $250 per month is a good budget.

But what if actually you have been spending $450? That’s not an unreasonable amount; the price of food has been rising steadily for the last few years. Your budget is doomed to failure if you decide $250 a month is your budget. It’s highly unlikely that you can cut nearly half of what you have been spending.

2. Budget Based on the Monitoring Data

Once you know how much you are spending, sit and make adjustments that make your expenses match your income. Do start with basic bills. Need $50 for the electric bill? Budget for it. Need $375 for groceries? Budget for them.

Don’t stop until every category is covered.

For the first few months, don’t worry if you go over or fall under your budget. It’s normal to have some categories not match completely. Spending for everything not fixed varies. It’s normal. You’re still gathering and refining data.

The important thing is to get clarity on what you need every month.

3. Make Your Budget Match Your Income

What happens if your income doesn’t cover the budget?

Well, one of the joys of monitoring expenses if that you know what you have been spending. After you know what you spend in a typical month, you can cut it. If you need to make adjustments in the budget, start by cutting discretionary expenses 10%. So if you’ve been spending $375 on groceries, see how you can cut grocery bills by $37.50.

Every discretionary category can be done this way. Spend $200 on eating out? Cut 10% the first month. See if you can make a game of it. One less lunch or dinner can be $20+ saved. Entertainment? If you spend $100, rent DVDs at the library (DVDs? Yes DVDs lol) and add your $10 for a movie ticket to balancing the budget.

Then, as you salary increases, add back that 10% and save for big ticket items like vacations, houses, and cars!

And that’s how you develop a workable budget.