This “ Money Management : How To Create A Budget ” post details how to a create budget with better results. It is an attempt of the author to shed light on what steps one needs to undertake to create an effective budget. This post contains affiliate links/ads. See disclosure policy.
If you end up on this post, you are likely looking for ways on how to make a working budget.
Frankly, people make budgets as part of their money management.
According to a survey conducted by GOBankingRates.com, 62% of Americans have less than $1,000 in their accounts (savings) and 21% don’t have savings account. This is shocking information.
People have different reasons for not saving money, some of which are valid and some are just plain baseless. But there’s no better time to save money than to save now.
In order to save money, one needs to fully understand what his/her income and expenses are. This is where budget comes to the picture.
Budgets are important for money management.
So, the one million dollar question is, how to create a budget? The answers you are looking for are here.
Money Management : How To Create A Budget
The reality is, budgeting may sound so simple but, sometimes, it really isn’t that easy to create one. Many people have tried and many have also failed. So, how do you create a budget?
Gather all receipts or statements
Money management is possible when you have a working budget.
A working budget is only possible not only when you have a budget template but also when you gather all your receipts and statements.
Remember, historical data can help you trend your expenses and income, which you can use to project your expenses and income in the future. This is where all those receipts or statements can be useful.
You may need to obtain all your receipts for the past 12 months.
This way, you can trend your income and expenses by month based on the historical data you gathered. Don’t just say that your expense for a category is this amount or that amount. You may know your expenses, but the truth is, until you look through all those receipts, you’ll never know how much exactly you spent on various expense categories.
Record your income from all sources
If you only have one job, then, you only need to get your paycheck information.
However, some people have multiple jobs and/or earn income from multiple sources. If you are one of these people, then, it’s best that you get all the pay information from all those sources.
Effective money management through budgeting can only work when you know what your income.
Always include all your incomes because this information will be handy when you start reconciling your budget with your bank account.
Record all your expenses
The next step you need to do is record all your expenses.
When you’re unable to determine what your expenses are, you can always consult your financial statements to get such information. Before sitting down and creating a budget spreadsheet, collect all your receipts and categorize them accordingly (e.g. categories such as gas, utilities, and food).
Have an envelope for each category or you can always find your own ways to store the receipts by categories.
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Analyze your expenses
Money management is all about analyzing and understanding your income and expenses. So, is creating a budget.
Before creating your budget, you need to analyze or assess your expenses. You need to determine which expenses are likely to be one-time and recurring using your financial statements.
The value of performing such activity is it allows you to discard expenses that may not be incurred monthly.
One good example is property taxes. If you own a property, you don’t pay tax on it every month but you do pay on it once year.
You also need to analyze your expenses to determine which ones are fixed and variable. Historical data such as your financial statements can help you figure out which expenses are fixed and which ones are not.
Fixed expenses include payments on rent, mortgage, cars, cable and internet.
These expenses tend to be fixed every month and don’t vary that much. Variable expenses include transportation gas, utilities, and groceries. Both of these expenses are critical when making and/or adjusting your budget.
Setup your goal
According to Setting Goals: Who, Why, How?, studies show that setting goals increase rate of success in various settings.
When you create a budget, you should always set up a goal.
Don’t ever create an open-ended budget. When you do that, you are really not setting up a budget. A budget is there to show you where you are going over and where you have surpluses.
One important thing I can say is to set up realistic goals. Don’t try to set up a goal of saving $2000 when your monthly income is $2000 and your expenses total to $1000.
Just a side note, it is much easier to do a budget when you know that you’re budgeting for something. Well, in a nutshell, that’s what goal is about.
Create your budget template
Now, it’s time to squeeze all that information into a budget template.
You can always use any ways or methods to create your budget. Some use MS Word and some use the old fashion pen, paper, and calculator.
However, I recommend using MS Excel as this tool is easy to use and can be dynamic enough to incorporate any kind of budget requirements you may have.
When creating your budget template or budget plan, always make separate sections for income and expenses.
You need to be clear right from the start where the income and expenses should be placed. When you have a ton of information right in front of you, it is really easy to get lost and make data entry errors.
Once you’ve done your template, you will be able to see if your income is more than your expenses. If it is, then, you can save the money towards retirement, college funds, emergency funds, and other necessary fund accounts.
If it’s the opposite, then, you will need to make necessary adjustments to your income and expenses.
Make sure your data sources are properly reconciled
Budget is used not only to track your expenses but also to reconcile the information contained in the budget with your financial statements.
Always monitor and update your template as new transactions are made.
Instead of updating it at the end of the month, it is best to do it everyday to ensure that all transactions are accounted for. You’ll thank yourself for doing this constantly rather than performing it at the end of the month.
Always reconcile your template with your financial statements. Reconciliation is a must for effective money management.
If you happen to see discrepancies between the two datasets, then, you need to research where such discrepancies are coming from. It is critical that these are always equal to make sure that you are not missing any transactions.
Make necessary changes
When you create a budget, it doesn’t necessarily mean that your budget needs to be fixed. Remember, there are life changing events that happen and, sometimes, they come unexpectedly.
Always check your budget to make sure that it truly reflects your current situation. If your situation does change, then, you need to change your budget accordingly.
It is important to always sit down and assess your budget.
After the first month, sit down and look through your budget and see where you went over your budget or where you had a surplus. From here, you can make necessary adjustments.
Final Thoughts On Creating A Budget
Budgets have always had both positive and negative connotations. For some, budgets are tools that many can use to track their financial goals. For others, budgets are about cutting down on expenses or restricting spending. The truth is, budgets can be both scary and rewarding, at the same time.
I’ve known a lot of people who want to go on a budget. The first ironic question I always ask is if they have a budget in place.
Not surprisingly, the answer I get almost always get is a big NO. For those who want to go on a budget, it is imperative to have an estimated budget in the first place.
Budgets or budgeting can be daunting at times but it is possible to create.
Though you may not create a perfect budget on your first try but always remember that there’s a room for improvement and budgeting is not an exception to that rule.
There’s always a learning curve in budget creation. But once you get a good handle on it, budgeting can be a second nature to you and can be fun as well.
How do you budget? How do you make sure that you keep your expenses within your budget?