Creating a budget with this guide can help you gain control of your finances and save you money for the future: money to pay off debts faster, money to put towards savings or retirement, or money to have fun with. This guide will help you create your own budget, an action plan, if you will, so you can become the architect of your finances. If you’re stuck on the word “budget,” we’ve got help for you there, too. Go to our article “Budget: The Four-Letter-Word That Isn't” and learn how to get over the Budget stigma that prevents most people from creating what could be the best and most useful tool in their financial toolbox.  Mindset is critical.  Enjoy.

Step One: Decide to Start a Budget.

If you are reading this article, chances are, you have already made the decision to begin creating a budget of your own.  Congratulations!  You are halfway to the goal line already. Read on, Rudy Ruettiger.

Step Two: Gather Every Financial Statement You Have.

You are going to want to spend about a month preparing for this. It doesn’t have to be January first to start, either. Now is the best time to start. Today is the day to take action. Begin by tracking your expenses for at least the next month, using a smartphone application, computer program, or old-fashioned pen and paper.  Be sure to record every purchase, no matter how small. Keep all your bills and statements, including paperless transactions on the web.  This includes bank statements, investment accounts, recent utility bills, and any information regarding a source of income or an expense.  One of the keys in your budget-making process is to create a monthly average, so the more information you can dig up, the better.  If you want to start with the past, that’s okay, too.

Step Three: Record All of Your Sources of Income.

List every source of income you have. If you are self-employed or have any outside sources of income, like child support or social security, be sure to record these as well.

Your income will be either gross income or net income. Gross income means income before taxes and other deductions. Net income means the income after your deductions have been taken out or income that is not taxable.

If you have any gross income and you are responsible for paying your own taxes, then the first thing you must do is deduct and pay those taxes. If you pay quarterly, keep your tax portion in a separate account until it’s due. Make sure that account is not linked to your checking account because that money is for nothing else but taxes. You never want to touch it until you have to pay your taxes.

If your income is net, usually in the form of a regular paycheck with the taxes automatically deducted, then you are ready to go.  Your taxes have already been paid.  Just make certain that your employer is taking enough out, but not too much. Some states tax your refund, which has already been taxed, but we won’t go there. It’s just better to have your refund be as small as possible by having your withholdings be as close to what you will owe as possible.

Step Four: Create a List of Monthly Expenses.

You should have all your bills in front of you. Don’t forget payments you make one time a year. Write the list of all your expected expenses: every expense you plan on incurring over the course of each month and a full year.  This includes your rent or mortgage payments, car payments, auto insurance, groceries, utilities, fuel for your car, entertainment, dry cleaning, student loans, retirement or college savings — essentially everything you spend money on. This will probably be a long list unless you’re still living with your parents.

Don’t be surprised if you have to add to this list each month. Unexpected and forgotten expenses come along all the time. That’s normal.

Step Five: Break Your Expenses into Two Categories: Fixed аnd Variable.

Fixed expenses are those that stay relatively the same each month. I even have a fixed electric bill as our electric company averages our bills over 12 months and charges us the same amount each month, just so we don’t have huge bills in the hot Arizona summers. Fixed expenses usually include things like your mortgage or rent, car payments, cable, internet service, trash pickup, and so on.  These expenses, for the most part, are essential, and not likely to change from month to month.

Variable expenses are the type that will change from month to month.  They include items such as groceries, fuel for your car, entertainment, dining out, fast food, and gifts, just to name a few.  This category will be important and require more monitoring and making adjustments.

Step Six: Total Your Monthly Net Income and Expenses

Once you total both your income and your expenses, you’ll have a better idea of how you are doing, so far.  If your end result shows more income than expenses, you are off to a good start.  Be grateful.  This means you can prioritize your excess money into areas of your budget that need it, such as retirement savings or paying down your debt like credit cards. 

If you are showing higher expenses than income, it just means some changes will have to be made.  Be grateful you caught it now and that you are able to adjust your spending accordingly. 

Step Seven: Make Adjustments to Your Expenses.

If you have accurately identified and listed all of your expenses, the ultimate goal would be to have your income and expense columns in your budget be equal.  You want to know where every dollar is going.  All of your income would be accounted for and budgeted for a specific expense or savings goal.  Perfect!

If you are in a situation where expenses are higher than income, and even if your expenses are good, you should look at each expense to find places to save money or expenses that you can eliminate.  Many times, you'll find expenses you can cut in your Variable Expenses since these expenses are typically non-essential.  Do your best to choose wisely the places where you can shave a few dollars off.   Prioritize your expenses so you cut what you don't need and keep what you do.  

If you have debt, read our debt snowball article.  We will show you how to pay it off fast and with less interest.

If you have extra income, make certain that you are eliminating as much debt as possible each month. When your debts are paid, put that money towards retirement or educational savings for your children. Never spend money willy-nilly. Every dollar must have a purpose. Remember, you are the architect, the master-builder of your financial future. Every brick should be placed carefully in your plan.

Step Eight: Review Your Budget Often, at Least Monthly.

It is important to review your budget on a regular basis to make sure you are staying on course.  After the first month, take a few minutes to sit down and compare your actual expenses versus what you had created in your budget.  This will show you where you did well and where you may need to make adjustments.  This is also when you'll find those trickily hidden expenses you may have forgotten about.  Pruning your budget will become a habit you enjoy, especially once you are debt-free and your retirement saving begins growing.

Budgets are a necessary part of a good financial plan. It allows you to see instantly where your income is coming from and exactly where it is going. Look for our articles on the subject of budgets to find where you might cut expenses or even increase your income here at the Prosperity Process.  We are here for you.

Michelle R Russell

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