Creating a Budget That Works
Creating a working budget that you can stick to does not need to be difficult. Creating budgets isn't necessarily the sexiest task in the world, but if you master this personal finance skill you will have more money, owe less, and be on your way to financial freedom, which IS sexy!
First off, prepare yourself for creating a budget for your family by collecting the necessary tools. In this case, you won't need expensive software programs, spreadsheets or advanced mathmatical skills. Though all these budgeting tools can be nice, all you really need to create a budget for your home is a pad and pencil, if you are not comfortable with sums, then a simple calculator will serve you well.
The first step to creating your budget is to take assessment of your current finances. In order to do so you will want to list your current expenses, by cost and type. Are you spending $100 on dog food each month? If so, be sure to list this expense and all the others no matter how small. When I am creating an initial budget I don't worry about exact numbers but instead round to the nearest zero and make my best estimate for total costs. Later, as the months roll by, once you are carefully keeping track of every purchase or payment you can get more exact, but for the time being we are just getting a general idea of the liabilities your household faces from month to month.
During this stage of budget creation you will benefit from accurately detailing your various monthly costs, but not to worry, if you miss something you can always add it in later. Budgets are living things that adjust and shift based on your circumstances and current needs.
Once you have accumulated your pre-budget assessment accounting take a look at all of your costs, now that they are easily accounted before you, it can often reveal some rather surprising costs. Perhaps your spending on dining out is a surprising percentage of your monthly disposable income. Maybe insurance costs are higher than you expected. Your budget is personal to your finances but the idea is to look for any out of the ordinary costs that are revealed.
The next step is to take your expenses and group them into various categories. For example, dining out at your favorite restaurant, tickets to the theater, and the expense of going to a hockey game can all be grouped under a category of 'entertainment'. The power of budgeting is creating a big picture understanding of your finances. Mapping the ebb and flow of your money matters as it were.
Once you have your current expenses categorized and organized, you are now ready to begin budgeting for the future, or creating a forecast budget. If you are wondering why you didn't create a budget of what you can spend from the start, it is because it is unreasonable to expect yourself to stick to a money budget if you created it without a clear picture of what you are currently spending.
When creating your spending budget for the future, we recommend you first account for the absolute essential spending costs you incur monthly. These include rent, necessary insurance costs, basic food supplies for your family, and to and from work costs incurred.
You might be in the position that these costs alone compose your entire monthly income, if this is the case, the good news is that at least you now know you need to seriously address your finances as you will not be able to sustain this spending indefinately. Use the accounting of your costs to trim your spending from largest to smallest where possible.
If you are have a little disposable money beyond your essential costs for the month, we recommend when creating your projected budget for spending that you start with this money.
At this point you simply make reasonable goals for your spending that accounts for each of the spending categories you created earlier when accounting for your costs. For example, if spending $200 monthly for entertainment would save your household money while being reasonable to meet, set this financial goal and stick to it. You can always adjust your budget goals from month to month if you did not account for certain realities.
When you create a budget for your spending, remember to account for an amount of savings as an expense. The purpose of creating a budget is to get on top of your spending and manage your money better with the big picture feedback that is provided. Budgeting simplifies your finances and this is why it is so valuable to do. Treat your savings like an expense, planning the amount you would like to save monthly as a cost, for example: $250 monthly to a savings account. Set your budgetary goals, even those that directly benefit yourself, and stick to them.
This is where the term, 'pay yourself first' comes from.
Your first budget will not be perfect. As your income grows and you adjust your monthly expenses, you will want to update the budget you created, but with there is no doubt that the insight your budgeting will provide will prove invaluable to the future of your personal finances.
