If you are here, you must want to know how to create a budget. For information on why you need a budget, make sure to check out my previous post.
Creating a budget is pretty easy and you can totally tailor it to your family’s or individual needs. There are a few basic steps to creating the budget you desire that anyone can use as their formula.
Let’s look at step 1: Calculating your income.
To some people, calculating your income is very cut and dry. You may have a salary or another type of fixed income. For others, your income can vary. To calculate your variable income for the purpose of creating a budget, just do an average of the last 6 months.
Let’s say you earn $2,800 one month, $2,600 the next month and $2,300 for the next 4 months. The average income for you is $1,900. If you don’t remember how to do an average, it is a very simple formula:
Add up each month’s income one by one for 6 months and divide by 6 (since we are looking for a 6-month average). In this case, it would be:
2,800 + 2,600 + 2,300 +2,300 +2,300 +2300 /6= $2,433.33
for your budget, you would be working with $2,433
Step 2 how to look at expenses.
When I do a budget, I put the most important expenses at the top. These are my “no-negotiating expenses”. These are things like rent/mortgage, car payments, insurance, utilities, phone etc.
So let’s say your expenses in the no-negotiating zone are as follows:
- $800 rent
- $100-car insurance/rental insurance
- $380 Car Payment
- $100 phone
- $100 electricity
This is a grand total of $1,480
Subtract that from the $2433.33 average income and you are left with $953.33
Now, onto the second part of deciding expenses. This is where you have some wiggle room. With the $803, you can divide it into everyday expenses such as groceries, gas/fuel, entertainment, etc.
Let’s say your grocery budget must feed 2 adults and a child. The average person eats $200-$250 dollars worth of groceries a month, so that is $625 off your leftover, leaving you with a total of $328.00
With that $328.00, you can now divide it even further:
$100 for entertainment- this can mean paying for cable tv, or just general things such as going to the movies etc.
For gas, it really depends on your commute, but I would say $100 is average with today’s gas prices.
You are now left with $103 each month you can use for clothing, eating out, etc. I would advise you to save at least 1/3 of your leftover money after all expenses are paid, however. It doesn’t have to be hundreds of dollars a month, either. A modest saving is still a savings and will still be there to help you if you need it. Don’t feel like because you can’t put a ton of cash away each month that it is not worth it. I once saved all my change over a 3 month period. I didn’t feel the sting of saving it at all. When I went and counted it, I have over $100 in that jar!
While this is an over-simplified budget, you get the idea. I know that there are little expenses that eat up a budget and things that I did not include. We will look more in-depth at that in the next few posts.
One small piece of advice: Don’t beat yourself up for not being able to strictly stick to a budget at first. It is not only a financial adjustment, but it is also a lifestyle change. It will take time to adapt to.
In the next post, we’ll look at sneaky things that can destroy your budget and expenses that can be cut for cheaper alternatives.