Creating a Budget

Last Updated: November 17, 2018
Creating a Budget

A lot of people get through life one paycheck and credit card bill to the next, spending money when they have some and occasionally worrying about how they'll pay the next bill. It works as long as you can keep juggling everything in the air, but at some point, life throws a curveball at you. Whether it's expensive car trouble that needs fixing, a flu that makes you miss a week of work, or something even smaller, income tends to be relatively fixed, while expenses fluctuate.

Which means if you want to get a handle on your finances and start saving some money for a rainy day, you need to create a budget. It helps you keep track of where everything's going, so you can better understand what you're spending money on.

The basic breakdown for most budgets goes something like this:

Step 1: Calculate how much money you make after taxes on a bi-weekly basis.

This is usually the simplest step, especially if you have a salary job or relatively steady hours. If the amount varies significantly, then your best bet is to skip this step for now and come back to it later.

Step 2: List fixed expenses.

Rent, utilities, car payments, insurance, phone bill: basically everything that you can't really choose to stop paying. To be really thorough, include a food budget here. If you don't know how much money you spend on food every two weeks, then isn't it a good thing you're forming a budget now?

Keep your receipts the next few times you go grocery shopping, and get an estimate for the average. So if you go weekly instead of bi-weekly, then average the two trips. You won't always buy the same things every time, but if you start really focusing on keeping track of what you buy when, you'll notice the staples, and those are the main things you want to write down: the stuff you need to feed yourself on a week to week basis.

Step 3: Decide on financial goals.

This is the first step of the process where you need to start making some choices. What's important to you? What long term goals are you striving toward?

Things people tend to use excess income for include paying down debts. That can be student loans, credit cards balances, anything that paying more of than you need to can help you save money in the long run, and eliminate the debt faster.

It also includes safety buffers. The more money you have saved for a rainy day, the more emergencies you're protected from. Even if it's just 20 dollars a week, every bit will help when you really need it.

And of course there's the retirement fund. There are many types of Individual Retirement Account (IRA) that we'll cover in another article, but in general they all share a number of advantages over simply tucking money away in a bank account, such as being tax-deductible.

Step 4: Luxuries

Whatever you have left after deducting the mandatory bills and deciding on your financial goals, that's your luxury fund. Whether it's eating out, seeing a movie, or buying new gadgets or clothing, this is where self-control comes into play. Being aware of how much money you have to spend every week, and only spending that much, is the true strength, and true difficulty, of budgeting.

Over time, as you become more aware of what you spend money on and have to decide what you really, really want versus some impulse purchases, you start to get better mileage out of your luxury fund, and will probably even find yourself with some leftover. That leftover money can be put toward your financial goals, or saved for the next cycle toward some big luxury purchase.

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