Making a Budget

Making a budget is an important step toward financial security. Budgeting helps you to live within your financial means. It allows you to know how much money you have coming in and how much you have going out. Many people are afraid to sit down and look at these numbers simply because they feel more comfortable NOT knowing! Ignorance can be bliss in this area, but it can also be disastrous. If you want to start to live in a more frugal way, making a budget and implementing it is essential.

making a budget
  • Gather up your financial information. This includes bank statements, investment accounts, utility bills and any information regarding a source of income or expense. For making a budget you want to be able to find a monthly average, so the more information you can dig up the better.

  • Record all of your sources of income. If you are self-employed or have any outside sources of income be sure to record these as well. If your income is in the form of a regular paycheck where taxes are automatically deducted you can use the net income, or take home amount. Record this total income as a monthly amount.

  • Create a list of monthly expenses. Write down a list of all the expenses you have over the course of a month. This includes a mortgage payment or rent, car payments, groceries, utilities, entertainment, retirement or college savings and everything else you spend money on. (For bills that you don't pay every month like car insurance, divide the 6-month amount by 6 and add this to the monthly budget.)

  • Be realistic. A budget is like a diet - Don't set impossible goals. If you normally spend $500. on groceries each month, don't try making a budget that only allows $200. for groceries. You will end up not sticking to your budget because you won't be able to! Similarly, making a budget that doesn't allow you any fun money will be hard to stick to because you will feel deprived.

  • Break expenses into two categories: fixed and variable. Fixed expenses are those that stay relatively the same each month and are required parts of your way of living. They included expenses such as your mortgage or rent, car payments, cable and/or internet service, trash pickup, credit card payments and so on. These expenses for the most part are essential yet not likely to change in the budget. Variable expenses are the type that will change from month to month and include items such as groceries, gasoline, entertainment, eating out and gifts to name a few. This category will be important when making adjustments.

  • Total your monthly income and monthly expenses. If your end result shows more income than expenses you are off to a good start. This means you can prioritize this excess to areas of your budget such as retirement savings or paying more on credit cards to eliminate that debt faster. If you are showing a higher expense column than income it means some changes will have to be made.

  • Don't count on windfalls. When projecting the amount of money you can live on, don't include dollars that you can't be sure you'll receive, such as year-end bonuses, tax refunds, or investment gains. (Don't count your chickens before they hatch!)

  • Make adjustments to expenses. If you have accurately identified and listed all of your expenses the ultimate goal would be to have your income and expense columns to be equal. This means all of your income is accounted for and budgeted for a specific expense. If you are in a situation where expenses are higher than income you should look at your variable expenses to find areas to cut.

  • Beware of spending creep. As your annual income climbs from raises, promotions, and smart investing, don't start spending for luxuries until you're sure that you're staying ahead of inflation. It's better to use those income increases to save more.

  • Review your budget monthly. It is important to review your budget on a regular basis to make sure you are staying on track. After the first month take a minute to sit down and compare the actual expenses versus what you had created in the budget. This will show you where you did well and where you may need to improve.

  • Stick to your budget. The hardest part of reaping the rewards of making a budget is to stay with it once you have created it. Come up with strategies for living on a budget to help you stick with it for the long haul.


  • Always get free checking: You want free checking with no minimum balance and no account maintenance fees. These are plentiful so don’t settle for less. A free checking with a minimum balance is interest you’re not getting from someplace else.

  • Only use your own bank’s ATM: ATM fees are going up every year, but most banks don't charge a fee to their customers when they use their ATM. when you use another bank’s ATM, your bank will charge you a fee and the other bank will charge you a fee, too.

  • Late fees: Many credit cards have a policy to forgive one late payment per year, but you have to ASK them! If you always pay on time and mess up once and are charged a late fee, call and see if they will remove it.

  • Don’t use a card with an annual fee: There are plenty of cards available with no annual fee, so unless it is a secured card and you’re rebuilding your credit, find one without a fee. If you call your current card and tell them why you plan to cancel the card, they might offer to get rid of the annual fee if you keep the card.

  • Request rate reductions from your credit cards: If you’re carrying a balance, ask for a rate reduction. Many companies are agreeing to these requests because they know the credit market is tight, they’d rather take a little less now than risk defaults.

  • Use billpay or electronic payments: Mailing in your payments costs you 42 cents each time, 42 cents you can use somewhere else. Also, an identity thief could easily nab your payment, open the envelope, and steal your check. It contains a ton of information on it (bank account numbers, name, address, your signature) and is one of the most insecure methods of payment.
    making a budget
  • Bundle insurances: Ask your insurers if they offer discounts for bundling insurances, many of them do. You can save more by shifting your auto insurance over to your homeowner’s or life insurance company (and you deal with only one company).

  • Increase insurance deductibles: The easiest way to reduce your premiums is to increase your deductibles, the amount of out of pocket expenses you need to foot before insurance kicks in. It shifts risks from the insurance companies to you, so be sure to boost your emergency funds to cover it in the event of an accident.

  • Consider paying extra towards your mortgage.

    Paying off your mortgage early will greatly reduce the amount you pay in interest over the lifetime of the loan. Use this mortgage pay off calculator to see how much you are currently paying for interest and estimate how much you can save.


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