Creating a Budget: Money Management 101

For most people, the word “budget” conjures up thoughts of penny-pinching and the unpleasant task of crunching numbers. This couldn’t be further from the truth. A budget is the cornerstone of a solid financial foundation, regardless of your situation, and it isn’t that hard to do.

A budget is nothing more than a breakdown and plan of how much money you have coming in and where it goes. Could you imagine a business becoming successful if it didn’t keep track of its income and expenses? The same holds true when it comes to your personal finances. If you don’t know how much money you have coming in and where it goes, your road to financial success will be a difficult one.

The biggest fear that most people have when creating a budget is that they will need to suddenly cut back on all of the fun spending — things like the occasional coffee or dinner out, movie night, or even the trip to grandma’s for the holidays. While you may find that you do need to cut some spending after putting together a budget, without actually sitting down and creating one it is impossible to know what expenses need to be cut, if any.

budget

Creating Your Budget

The first step in creating a budget is to determine how much income you have. This is quite easy and typically only requires you to take a look at your pay stub. Of course if you’re married, be sure to include your spouse’s income as well. In addition to your regular pay you’ll want to also include any other sources of income you may have such as dividends, interest, a side business, and so on.

Now that you know how much income you have coming in it’s time to take a look at your monthly expenses. Start with the regular and fixed payments you have, such as your mortgage or rent, car payments, insurance, debt and taxes. For most people these are going to be relatively fixed, meaning you can’t easily change the amount that is due each month.

After you’ve listed your fixed monthly expenses it is time to dig deeper to find out where the rest of your money goes. Take out your checkbook or pull your latest bank statement to help you with this step. Jot down how much you spend on things like utilities, groceries, entertainment, subscriptions, and so on.

You should now have all of the information needed to help you create your budget. So, go ahead and total up your monthly income and all of your monthly expenses. Subtract your expense total from your income total and you’ll have either a positive or negative number. If you have a positive number, congratulations, you are spending less than you earn. Don’t worry if you have a negative number. The whole reason for creating a budget is to identify deficiencies and find out how to address them.

Now that you can visually see how much you fall short, you can adjust your spending or saving in certain areas to improve the situation. Oftentimes you’ll realize that by just making a few small adjustments to your spending habits, you can significantly improve your situation. Maybe this means cutting back on one of your magazine subscriptions, eating out one time less a month, or even just hitting the matinee instead of the primetime movie. Typically, just saving a few dollars here and there can be enough to not only make sure you spend less than you earn, but also apply a few extra dollars to things like high-interest credit card debt or your retirement savings.

Let the Internet Do the Dirty Work

If the idea of digging through monthly bank statements to see where your money is going doesn’t sound very fun, you’re right. That’s the old way of budgeting and today we can harness the power of the internet to have the calculations done for us and even present the data in a far more meaningful way. It also takes the repetition out of monthly budgeting.

There are two main players in the online budgeting game: Bundle and Mint. Both of these sites do roughly the same thing and will automate the bulk of your budgeting tasks so I encourage you to try them out to see which one works best for you. The best part is with either of these sites you can seamlessly link your existing financial accounts and it will automatically pull your transactions in and categorize your expenses and display the data in an easy to understand format. I’ve been using Bundle a lot so I put together a Bundle review last year to walk you through it.

Putting Your Results to Work

After you’ve set up your budget and have identified areas for improvement it’s time to put that knowledge to work. If you have discovered that you’re living paycheck to paycheck or simply don’t have any money leftover at the end of the month you can dig a little deeper into your spending to see where you can spend less. If you realize that you’re spending $500 a month on just going out to eat maybe you’ll be able to prepare a few extra meals at home and shave $100 a month from your dining out expenses. Then you could use that savings to pay down credit card debt faster, put it into a savings account, or stash it away for retirement.

Even if you discover that you aren’t spending every penny you make you may also discover better ways to utilize your surplus each month. Maybe now you will realize that there is enough money to start up a 529 plan for your kids or put a little extra toward that down payment on a house you’re thinking of buying soon. Again, all a budget is meant to do is to help you understand what money is coming in and where it is going so that you can identify opportunities. It isn’t always about sacrifice.

Author: Jeremy Vohwinkle

My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.

2 comments
walkssophia
walkssophia

In any kind of budgeting system, expense carries a legitimate importance and that is what helps make the things move precisely in a streamlined and straight forward manner. For a successful and systematic approach, I believe that the more user friendly and calendar based a tool would be the more reflective would be end result.

Staci
Staci

Great article! I love that you are trying to make budgets easy and fun.

Budgets should be fun! They are a great way to help you spend the money you have in ways that make you happy. Paying 19% interest on a credit card probably doesn't make you happy, so by budgeting you can find faster ways to pay off that card so you can use that interest payment to buy things you love!

Budgets aren't meant to restrict you. They are meant to set you free! Like I always say, "your budgets shouldn't be a corset. It should be sexy pencil skirt that fits you in all the right places."