6 Steps to a Working Budget
Get your budget off the ground in six quick steps
Budgets are an essential element of well-managed household finances. It's easy to forget that budgeting isn't about depriving yourself. Budgeting is about setting limits and sticking to them. Just as you know that if you overeat too often, you're going to gain weight, you should know that if you don't set limits with your spending, you're going to end up in debt.
Your financial health depends on your ability to set a realistic budget and then to maintain that budget. There are some specific steps you can take to get your budget off the ground.
1. Set up budget categories
Set up categories for your budget, such as automobile maintenance, home maintenance, groceries, dining out, cleaning supplies, income taxes, toys for the kids, toys for the adults, and any other expenses you think you might have. Fill these categories with genuine and true estimates. If you know you've spent $500. on groceries in the past month, it's a sure bet you'll spend that much or more next month. See the sample household budget for examples.
2. Know your income
Calculate your income from previous months. In this category, it's better to underestimate than overestimate, but don't be afraid to be as accurate as possible. Fake numbers aren't fooling anyone. Fake numbers also make a budget worthless.
3. Don't panic, yet
Don't try to trim your expenses until after you've completed your first budget. You want to see if you're overspending or underspending BEFORE you decide what you need to do about it.
4. Know your bottom line
After you've subtracted your expenses from your income, you can begin to panic. Give yourself no more than 5 minutes for this, because in truth, panic won't help you. And if you're lucky enough to discover that you have money left over every month, decide how you want to celebrate. For the rest of us, this is the time to see where we can realistically expect to be successful at cutting back our expenditures.
5. Trim your expenses
It's easy to chop away at the grocery and gas categories, but it's unrealistic. Most of us aren't overspending in these categories. Look hard at the leisure categories, the toy categories—for both children and adults, the dining out and the cell phone bills. These are the categories that will have the least impact on your household in the long run. You can't cut back home maintenance—in fact, most people don't set aside enough in this category, or in the auto maintenance category.
6. Put aside excess, and if there's no excess, create some
When you do have money to spare, save it. If you budget for a splurge, you're much more likely to enjoy it without feeling guilty! If there's no money left for saving, then you haven't cut enough flab from your budget. Saving should be your number one goal.
Now you have a working budget. You know how much money you have coming in and you know what you're going to spend. Stick to it. Don't think of it as a review, think of it as a spending plan. Look at it tomorrow and every day after, and spend your money where you said you would.
The purpose of your budget is not to show you where you spent yesterday's money, but to guide you as you spend today's.
Here's a sample household budget of income and expenses with sample categories already set up.