Skip directly to content

Creating a Budget

creating - a - budget.gif

The word "budget" can conjure a dreary image of scrimping and sacrificing, so many people avoid the subject altogether. But creating a budget can help you to have the money for things you want. Make a list of all the items, large and small, that you need or would like to have but don't think you can afford. Many of them may be within reach if you budget well. Think of creating a budget as a financial strategy for your dreams. Doesn't that sound more appealing - and more manageable?


Budget math is simple: The amount of money going out should always be less than, or equal to, the amount of money coming in. If you're like most people, incoming funds are generally predictable and easily documented—your paycheck and earnings on savings and investments.

Money going out, however, may be a bit fuzzier. Sure, you write checks for bills and you know about how much you've spent using credit cards, but cash may seem simply to disappear. As a result, you don't have a good overview of where your money goes. Understanding and changing your spending habits is the key to successful budgeting. But brace yourself. When you sit down and force yourself to make an expense record, the evidence against you is in black and white.

Write down all your living expenses: rent or mortgage payment, utilities, transportation and so on. The monthly expense record that follows is a starting point. Some items on this list may not apply to you, or you may need to add other items.

To make your budget work, you'll need a record of where all your money goes. Keep a money diary every day or every week for a month. Document every purchase by getting a receipt for everything you buy, from the cup of coffee at the drive-up window on Monday morning to the movie tickets on Saturday night. If you don't get a receipt, keep a note pad handy to record the expense. Keep track of how you pay for things, too. Note whether you pay cash, use a credit card or write a check.

At the end of the month, fill out an expense record. For items you pay just once or twice a year (like semiannual car insurance payments), simply divide the payment by the number of months it covers and write that amount on the monthly record.



Going Forward: Reducing Your Living Expenses

As you go down this list of living expenses, you're sure to be surprised. You probably were unaware of just how much some of life's little pleasures are really costing you. Of course, you'll want more than one month's living expenses to use as a basis for figuring your budget. List your expenses for the past few months to get a better picture, and continue to record your living expenses for several months as you develop your budget. Reviewing your living expenses, you'll see areas where you can reduce spending and increase your savings. You'll also get a good idea of which expenses you can't change.

Now make a copy of the blank monthly expense record, only this time label it "Budget." This is where you'll fill in what you expect to spend in each category. Start by listing your constant living expenses. Housing costs and car payments, for example, typically don't change from month to month. Then set reasonable limits on the items that fluctuate, such as food and clothing. The trick is living within those limits. Putting theory into practice can be difficult, especially if you're not practiced at budgeting. Setting some goals will help you stick with the plan.

Reaching Your Goals

When it comes to spending money, human nature can cause you to be shortsighted. If you have money in your pocket and see something you like, the urge to buy can overpower your common sense. You need something to make the saving urge just as powerful as the spending urge. Remember those dream items you thought were out of financial reach? Those are the things to put on your list of savings goals. The important thing is to commit to paper just what you're saving for, then keep the list handy for extra motivation.

Start with the following chart, personalized to reflect your goals. Prioritize every item on the list and assign each a time frame—whether it's in weeks, months or years—to help gauge your progress in reducing your living expenses.

Savings Goals
GoalPriorityAmountTime Frame
Pay off bills____________   ____________   ____________
Emergency Cash Reserve____________________________________
New car____________________________________
Buy a home____________________________________


Now you've plotted your living expenses and your savings goals. Do they match? Probably not—and chances are it's the expense side that still needs some work. Ask yourself where you can spend less without drastically cutting your standard of living. Don't say you're going to give up something to save money unless you feel confident you can do it. Otherwise, you're just setting up your budget plan for failure.

Here's a brief list of suggestions to help you cut expenses and stick to your budget:

  • Don't buy anything on impulse.

  • Pay off credit cards each month. Charge items only for convenience.

  • Take your lunch and snacks to work. Avoid vending machines.

  • Buy in bulk; use coupons.

  • If you smoke, quit. It's good for your health and your budget plan.

  • Entertain at home instead of going to a restaurant.

  • Put some money into your savings and retirement plan every pay period. If your company or bank has an automatic savings plan, sign up.

  • Contribute to your qualified retirement plan.

If you've trimmed and cut, squeezed and cajoled every penny out of your expenses but still can't meet your savings goals, re-evaluate your goals. You may be able to buy a Ferarri, but not within the next five years. Where appropriate, change the time frame or adjust the goal itself. You may also want to consider ways to increase your income, such as taking a part-time job.

Life's Ups and Downs

Ideally you want to save at least 10% of your earnings, but no amount is too small. Saving your change in a jar? Good. Even a dollar a day adds up to $365 a year!

Life, however, has a way of upsetting even the best-laid budget plan. There are two ways to adapt to a budget-busting experience:

  • For minor upsets, just get back on track as soon as you can.

  • For major life changes, redo the budget plan and the savings goals. The loss of your job, a problem with your health or a natural disaster will naturally require you to rethink your budget plan.

Just Rewards

Think ahead to a day in the not-so-distant future. The day you pick up your new car. The day you move into your new house. The day you start on the trip of a lifetime. With a smart budget plan, those days—and those goals—can be within your reach.




The Budget Kit: The Common Cents Money Management Workbook
Judy Lawrence, Dearborn Financial Publishing

Quick & Easy Budget Kit - 4 Steps to Manage Spending, Save Money, and Build Financial Security (CD & Workbook) by Jennifer Openshaw
Publisher: Family Financial Network

The Everything Budgeting Book: Practical Advice for Spending Less, Saving More, and Having More Money for the Things You Really Want (Everything Series)
by Tere Drenth
Publisher: Adams Media Corporation

Helpful Links
American Association of Individual Investors offers trusted articles and guidance on stock investing, mutual funds, bonds, retirement planning and more.
American Consumer Credit Counseling, Inc. helps consumers regain control over the quality of their lives through financial education, counseling, and debt management.
Lower My, part of Experian Interactive, is a free online service for consumers to compare low rates on monthly bills and reduce the cost of living.