How Do I Create a Budget?

Of all the ways to get out of debt, the only one that’s truly “clean” from a credit perspective is aggressive budgeting.  It’s also, unfortunately, the least fun.  It’s one of the best ways to control your spending and save for the future.  But, it can be a scary, which is why so many people skip this important part of planning for your financial goals.

Income and expense tracking

The first step is starting with your monthly income and tracking your monthly expenses.  You will be surprised to find out where your money goes when you write everything down.  You can put it down on paper, use a spreadsheet or other software you find on the internet.  You can begin writing down all your expenses for a month or go through your bills for three months or up to one year to get an average.  The first method will help you determine what happens to the cash, other than going towards Starbucks coffee.

You can divide your expenses into two categories; fixed (reoccurring or necessities) and variable (discretionary).  Fixed are utilities, mortgage or rent, car loan, other loans, insurance (car, home, medical, and life), groceries, gas, supplies, and minimum payments on credit cards.   You’ve got to make them every month or every few months.  Variable is clothing, eating out, and entertainment..luxuries.   Your credit card bills contain a combination of both variable and fixed spending.

Determine your budget

Now that you are aware of what you are spending, you need to add up your expenses and subtract them from your income. If you have a positive number, you can save that amount or put some towards any outstanding bills, like expensive credit card debt.  If that number is negative, well, you’re in trouble and you have to evaluate your expenses.  Is there something that you can give up such as dining out, entertainment, cable TV, and/or buying your lunch?  You may also consider a second job or more hours.  If you have credit card debt, you need to stop charging.

Be realistic with your budget. You may have to rework it many times until it works for you.  You can’t change your behavior, unless you are aware of what you have been doing and are committed.  It’s hard to “give things up”, we all know this.

Follow the budget

A budget is only good if you follow it.  Otherwise, don’t waste your time on the exercise of creating one.  The budget is a guideline to follow so you can meet your financial needs whether it is to get out of debt, buy a home, go on vacation, save for child’s education, retire early, etc. You don’t want to be too restrictive or you won’t follow it.  It has to be achievable and you have to be willing to live within your means.  It is like a diet and you may not always follow it, but you need to keep on trying.  Start with baby steps.  Going cold turkey with a restrictive budget is a recipe for failure.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  Follow him on Twitter here.

Categorised in: Financial, Saving Money

This post was written by John Ulzheimer