Calculating Total Net IncomeThe first thing you need to do to create a budget is to know how much total money you bring in each month. This includes all the money you bring home after taxes. It does not include any regular paycheck deductions. If you are self-employed and bring in varying amounts each month, calculate the average monthly income you receive.
Determining Monthly ExpensesWork on figuring out your monthly expenses next. It is important that you understand where every penny is going. List all your bills and expenditures—whether fixed or not. Include mortgage payments or rent, memberships, groceries, fast food purchases, car payments, insurance, transportation, and everything else.
Making Financial GoalsAfter you understand what your monthly needs are and how much you have in the way of discretionary income, you will need to set some financial goals. You can make short-term and long-term financial goals.
A short-term financial goal may be to pay off your credit cards or save for next year's vacation. Your long-term financial goals may include putting more money into a retirement fund to ensure you have enough to retire comfortably.
NeedsNeeds are the basics: things you can't do without. First among these is usually rent or mortgage payments. Other needs usually include utilities, food, clothing, transportation, and insurance. "Need" expenses usually occur on a regular basis, whether it is monthly, yearly, or less frequently.
WantsWants are non-essential and often for fun. They include dining out, monthly subscriptions, travel, and entertainment.
Charitable giving usually falls under this category. While many consider this a non-negotiable, the amount you give may be flexible and determined by other expenses, thus placing charitable giving in this second largest category.
Saving MoneyThe final 20 percent of your available income should be split between paying off debt and savings.
Thinking long-term is essential when you're saving. That means saving money for retirement. Social Security is seldom enough to live on comfortably. It is intended only to supplement other income or savings after you retire. And more money is needed for retirement today, because people live longer than they did 30–50 years ago.
You may want to keep your money for savings—whether short- or long-term—in a separate, interest-bearing savings account of some kind.
Long-term savings frequently includes a retirement plan such as a 401(k). Many employers offering retirement plans may match your contributions up to a certain amount. Take advantage of this free money by making the maximum allowable contributions to your retirement account.
Saving also includes an emergency fund. Sooner or later, you will have unexpected expenses, such as medical bills, car or house repairs. It is a good idea to have at least $1,000 for emergencies—and it needs to be easily accessible.
Making AdjustmentsAfter you have created your budget, some adjustments will probably be needed. You may have forgotten to add something, or the amount you set for one category may not be enough.
There may also be additional expenses, seasonal or occasional, requiring more money to be spent from one category or another. This may include things that you do not buy on a routine basis, such as school expenses, new shoes, and medical needs.
Controlling Your ExpensesAfter you create a budget, only you—along with others having access to your money—can control where the money goes. A budget is an ideal or a tool to help control where your money goes. Self-discipline will be needed to limit your purchases to what the family budget allows each month.
After you have spent your allotted amount on extras—such as fast food and eating out—curtail further spending in that area until next month. Or, take it from another discretionary area—but stop spending in that area, too, once that limit is reached.
You will still need to record your daily expenses to avoid overspending in any one area. Remember that any time you overspend in one area, it means having less to spend in another category.