Making a budget is a key piece of a strong financial foundation. Having a budget helps you manage your money, control your spending, save more money, pay off debt, or stay out of debt.
Without an accurate picture of what's coming into and going out of your bank account, you can easily overspend or find yourself relying on credit cards and loans to pay your bills. If you already have a budget, now's a good time to update it.
Download and Print a Budget Worksheet
Use a worksheet to help get started in order to complete all the steps below. You can also create your budget worksheet using free spreadsheet programs, including the ones offered by Vertex42 and It's Your Money, or even paper and pen.
List Your Income
Start by figuring out how much you're bringing in each month. Add up all reliable sources of income: wages from a job, alimony, child support, and more. Notice that word reliable. If you get cash from outside jobs or hobbies, but not on a regular basis, don't put the money down as income in your budget. Your budget should be a document you can depend on.
If you're self-employed or have a fluctuating income, use an average monthly income or an estimate of the income you expect to receive in a particular month.
Add Up Your Expenses
Some of your monthly expenses are fixed—mortgage/rent, property taxes, child support, and alimony—while others may vary, such as electricity, water, and groceries. List all the fixed expenses and the amount of the expense.
For your variable expenses, write the maximum amount you plan to spend in that category or the amount you expect your bill to be. For example, you might plan to spend $500 on groceries and $150 on gas.
Use your previous bank and credit card statements to help you figure out what you typically spend each month. Reviewing your previous spending can also help you uncover categories of spending you may have missed.
Some of your expenses don't occur each month. But accounting for those periodic expenses in your monthly budget can make it easier to afford them when they're due. Divide yearly expenses by 12 and semiannual expenses by six to come up with the monthly amount to account for in those categories.
Calculate Your Net Income
Your net income is what you have left over after all the bills are paid. You want this to be a positive number so you can put it toward your debt, savings, or other financial goals. Calculate your net income by subtracting your expenses from your monthly income. Write down the number, even if it's negative.
Adjust Your Expenses
If your net income is negative, it means you've budgeted to spend more than your income. You'll have to correct this. Otherwise, you may end up having to use your credit cards, borrow money, or overdraft your account to make it through the month.
Variable expenses are typically the easiest places you can adjust spending, e.g., eating out, hobbies, and entertainment. Even some of your fixed expenses can be adjusted, e.g., by reducing your cable or phone bill, canceling your gym membership, or not taking a vacation this year.
Evaluate your spending using a "wants vs. needs" analysis. Reduce or eliminate spending in those "want" areas to make more room for the things you "need" to spend money on.
Track Your Spending
Throughout the month, track your actual spending against what you budgeted. If you go over budget, doing this will help you figure out where you spent more money. In the future, you can take greater care not to overspend in that area. Or you may need to adjust your budget to compensate for the additional spending. If you increase your budget in one area, decrease it in another area to keep your budget balanced.