The 5 Practical Steps of Making a Budget

budgetBudgeting isn’t the most popular or exciting way to spend one’s time. For many, the very thought of it induces heavy sighing and immediate brain fatigue. Even for those who might consider themselves more “organized”, the process of creating a budget and sticking to it isn’t always straightforward.

Part of the problem is that a lot of people just don’t know how to budget their money, or even how it might benefit them in the long and short term.

The encouraging news is that you don’t have to be a financial advisor to come up with a reasonable spending plan that suits you and your family’s lifestyle. The process is easier than you might think and breaking it down into steps should help clear up the fog even further.

These are the five most basic steps involved in creating your own budget.

1. Come up with your total monthly take home income. – The first step is figure out exactly what you bring in every month in a dollar amount. Don’t confuse this with base pay. Your base pay is what you make before taxes and insurance costs are taken out. The number we want is simply the amount on your paycheck.

So, if you get paid twice a month and your paycheck is $981, than your grand monthly total will be $1962.

If you have other income streams, be sure to include them; though be aware that your total should only include reliable income that you can count on from a month to month basis. If it fluctuates a lot, try and get an average and use that number.

2. Come up with your total monthly necessary, fixed expenses. – Your next task will be to tally the expenses that go out on a monthly basis and that you know for sure you’ll have to pay.

Usually, they would include the following. I’ll include made up numbers for visual aid.

  • Rent or Mortgage: $725
  • Electricity: $90 (you might need to average this)
  • Water: $35
  • Internet: $40
  • TV: $45
  • Phone: $110
  • Car Insurance: $80

Now obviously, these will change from person to person, but the principal is the same. The reason things like gas and groceries aren’t included here is because they aren’t “fixed” and you have a lot more control over when and how you buy them. We’ll get to those in the next step.

Add all of them together for a grand total of, $1125.

3. Come up with your total monthly necessary, non-fixed expenses. –You could include a few different things here depending on your situation. Think of this category as things you know you’ll need, but that you don’t necessarily buy the same amount of at the same time. Gas and groceries are the most typical examples. Keep in mind these are monthly figures.

  • Groceries: $250
  • Gas: $150

Your gas and grocery bills will change a lot, but try your best to get the average amount from the last several months to use for running the numbers.

4. Find your monthly disposable income. – Your disposable income is the money you have left every month that you don’t need for necessary expenses. You can save that money, invest it or spend it on fun and entertainment. Just add your total expenses from steps 2 and 3 and subtract it from your total in step 1.

$1962 – $1525 = $437

So each month, you’ve got an extra $437 to spend on whatever you want. I always find this number to be pleasantly surprising, since allocating your funds can give you a lot more breathing room than just coasting by without knowing what the numbers are.

It would be wise to put back $200 of that $437 in savings. Even after that, you’ve still got $237 to spend. That’s about $60 per week for dining, coffee, movies or whatever else you want to use it for.

5. Be disciplined and stick to the budget. – The hardest part of having a budget is sticking to it and not breaking the cycle. If you’ve allotted $60 per week for fun, don’t exceed that amount. If you want something expensive like a new computer, wait until you’ve put back enough in your savings account and then use that money to purchase it instead of putting it on a credit card.

It’s not easy, but it is a much freer way to live. If you can stay disciplined enough to stick to your budget financial stress and anxiety will definitely decrease.

Consider also that as you work and get opportunities to earn more monthly income that original income number will increase. The more it increases, the more your monthly disposable income will increase.

When that happens, your savings will go up quicker and you’ll have more to set aside for fun and entertainment.

When it’s all said and done, there’s plenty of incentive to at least give it a try.

Kelly Williams is a professional blogger that enjoys providing consumers with personal finance advice. She writes for Instaloan.com, a leading bad credit loan lender specializing in title loans.

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