Debt Free

How to make a budget is one of the first questions you should ask yourself when you are planning for your financial success. Weather it’s a personal budget or a company budget, your skill at creating one and your ability to live within it will go a long way toward creating your ultimate financial success. It will provide a great tool to ensure you have money for the things you need and don’t overspend on those that you don’t.

So, how do you create a budget? The first thing you should do is to create categories for all your current and projected expenses. Make sure you include a category for emergencies. They always seem to crop up and you should budget accordingly. Start with your fixed expenses first. This should include rent or mortgage, any other fixed housing expenses such as taxes and insurance. If you have car payments, include these in the appropriate category. The same is true for any automotive related fixed expenses, such as insurance or monthly parking. If you have health insurance that you contribute to, or any other fixed expanses, create categories and include the appropriate expenses.

After you have created budget categories for all your fixed expenses, start creating budget entries for your variable expenses. These are expenses that are different every month, such as food, utilities, credit card accounts, and fuel. If you have copies of your recent utility bills, credit card statements and how much you’ve spent on gas, oil and maintenance for your vehicle, you can use these figures to help create a picture of what you can expect for your budget in the future.

Now comes the scary part. In order to create an accurate picture of your spending, you have to actually document every penny you spend. You may feel like a geek, but the only real way to accomplish this is to keep a journal. That’s right; you actually have to write down what you spend. This should include everything; gum, candy bars, cigarettes, lattes, drinks, trips to the Bahamas, whatever.

After you’ve documented every penny you spend, and categorized it appropriately for at least a month, you should have a representative picture of your spending habits. Certain things will not make into a 1 month spending journal. Recurring, but semi-regular expenses such as oil changes and tires can contribute substantially to your spending, but will often fall out of a 1 month spending journal due to their relative infrequency.

Look at your income for the month as well. For the majority of people this will consist of weekly or bi weekly paychecks. People that get tips, commissions or bonuses will have to do a bit more work to track their income, but tracking income is usually much easier than tracking spending.

After you have a fairly complete picture of how you come by your cash every month and where your money goes, the next step is to prioritize your spending. You should have your spending accurately categorized. Look at every budget category. Some of them will include money you really have to spend without much chance of reduction. Things such as a mortgage simply must be paid. Assign every category a priority from 1 to 5, with 1 being the most important. For example, your mortgage would be a 1. Go through all the spending categories you tracked throughout the month and assign the appropriate priority value. That will let you know where you can cut spending the easiest. If you’ve never actually tracked your spending before, you’ll probably be shocked at how much you spend on things such as gum, lattes, magazines, or any other seemingly insignificant expenses. These really add up in a hurry, but the bright side is that you may actually have way more money than you realize.

Now that you have prioritized all your money going out, you can create a budget. Assign an appropriate dollar amount to each category. Some of this will be effectively done for you, due to the type of spending. In other categories, you’ll have to come up with a figure that works in your particular situation.

Once you’ve created your budget, you’ll be able to find room for things such as investing and retirement savings that you weren’t able to afford before. That is the reason that a budget is so important for your lifelong financial success. It allows you to find the money that is slipping through your fingers and reallocate those funds toward making you financially secure.