The 411 on creating an effective budget #Budget#money June 16 | Guest post by Ash By: eric731 – CC BY 2.0 Most people find creating a budget a daunting thought, but in reality it doesn't have to be. Once you understand how to go about it, you'll find that creating a budget is actually a set of logical steps that are quite easy to follow. Here are the basics on efficient budget creation… Monitor your spending It makes no sense to assign some arbitrary numbers to your expenses, and then try to manipulate your spending to fit those numbers. So before you actually make a budget, the very first step is to monitor your spending. To track your spending, take note of how much you spend in a given month, including everything from regular expenses such as groceries to more spontaneous spends. For this, you could an Excel Spreadsheet, or even apps like Mint and You Need A Budget. Sort your expenses Now that you have an idea of where your money is going, try to sort out your spending. Two easy categories to start with are "fixed costs" and "flexible spending." Fixed costs include things you will spend on each month, with little variance in the amount. These could be rent or mortgage payments, phone bills, internet bills, car payments, gym memberships etc. Flexible spending consists of spending on things that can vary from month-to-month. Examples of flexible spending are eating out, shopping, entertainment and even groceries. Related Post Keep your spare change in a pirate-y treasure chest As someone who is always making that mad dash to the door, most days the whole lot of it was dumped unceremoniously on the floor... Read more Once you have this down, compare your fixed costs and your flexible spending. Consider your monthly income There are a surprising number of people who don't consider their monthly income while making a budget, causing them to overspend without realizing it. This may seem like re-stating the obvious, but the whole goal of budgeting is so that you don't overspend! Consider your financial goals Write out any and all financial goals you may have. Do you want to pay off a loan by a certain time? Do you want to buy a new car? Knowing your goals will help you define your priorities. Consider your savings It's always a good idea to save for a rainy day. In most cases, the recommendation is to set aside three- to six-months' worth of living expenses for an emergency fund in case of job loss, illness or an unexpected bill. You might also want to consider setting aside a certain portion of your monthly income towards retirement. Put it all together! Now that you've considered the main aspects of your personal finances, you need to put it all together. An Excel Spreadsheet, or even a physical accounts book, works just fine for doing this. For those who want to access your budget anytime and anywhere, there are a whole bunch of budgeting apps that allow you to constantly track your budget on-the-go. First, allocate an amount to all of your fixed costs such as rent, bills etc, by spreading them out into various sub-categories. This should be based on your actual spending and you will have to spend these amounts each month. Personally, I like to allocate a lump sum towards groceries, even though the amount I spend on them varies by month. I always choose a figure that's a little higher than what I would usually spend — knowing that I can always put the remainder into my savings. Second, allocate a certain amount that you will set aside to meet whatever financial goal you choose. Lastly, and based on what you have left, allocate a certain portion towards your savings. Remember to always put this portion of your income into your savings before spending on any other miscellaneous expenses. Ideally, this shouldn't harm your budget since this portion was allocated while keeping in mind all your expenses and goals. If your expenses are exceeding your income Then you'll have to find areas where you can cut down on your spending. Most likely, you will find some places in your "flexible spending," or "extras," where you will be able to save some money. Alternatively, if you find that your income largely exceeds your spending, don't go on a spending spree — put your excess income into your savings, or use it to meet your goals. In the long run, you'll be happy you did so! What are ways you kicked your ass in gear and figured out how to create a budget? Join our community! Reporter Name * Reporter Email * Original text Enter the original text here. Edited text* Enter your suggested copyedit here. Notes You can add a note for the editor here. * Required information. Fix Typo Guest post written by Ash Akshata is a 23-year old who is healthily obsessed (or so she believes) with all sorts of planning and management. She is interested in finance, entrepreneurship and tech. In her spare time, she writes about travel, food, and her daily doings at her blog The Happy Ranter. https://thehappyranter.wordpress.com PREVIOUS The 5 minute hack for making elastic waistbands smaller NEXT What is your go-to carry-on suitcase? Show/Hide comments [ 6 ] "Alternatively, if you find that your income largely exceeds your spending, don't go on a spending spree — put your excess income into your savings, or use it to meet your goals. " If you have a retirement account and you can set it up so the money gets deposited there directly instead of hitting your checking account first, do it! If you already have some money going to your retirement account, increase the amount that's going there. I always try to bump it up by 1% every time I get a raise, since in my case the math works out that I'm still getting more money every pay check even with putting more into retirement. 3 agree Reply Great advice! I was never able to manage a budget until I started tracking spending. I like using a spreadsheet because I can completely customize the categories to as few or as many as I like. Also, I can change my mind any time about how I categorize things. For example, I could have a single category for "insurance" or lump car insurance into "transportation", home insurance into "housing" etc. A friend gave me an amortization form for Excel, but I believe they are also available as various apps. Nothing motivated me to pay off debt and cut back on spending more than calculating the interest I would have to pay over time, and then figuring out the number of extra hours I would have to work just to pay the interest (based on take-home pay, not gross pay). Reply I love YNAB (you-need-a-budget) for this. It operates under the premise that you get your paycheck (or birthday checks, or whatever income you have) and then you allocate it to categories. Then when you want to spend your $, you subtract it from the categories. I always check to see if I have $ in my "lunch out" fund before I go out for lunch… and when I get a paycheck in, I decide how it's going to be spent, rather than reactively looking at my bills and going "how did i spend $XXX on eating out this month?!?!" It's been really good for my husband and I and has seriously helped us be much more aware of our spending habits and really focusing on how we want to spend our $$$. 4 agree Reply Came here specifically to see how quickly someone would mention YNAB 😀 Here's another vote for it! I was good with money before, but YNAB was a total game-changer. 2 agree Reply Hubby and I both receive social security disability (thank you texting driver… grrr…) so budgeting for us has changed from $65k/yr between us to almost $20k/yr. Thankfully, we were living well within our means at the time but try losing two-thirds of your income (and your ability to walk) and see what happens. It ain't pretty. Our empty nest is now filled with roommates to help pick up the slack. I created a spreadsheet in Excel. One worksheet has all of the contact information for all of our debt holders, including their websites. Another work sheet has our monthly expenses and bills with formulas set up to do the math for me. All of our payments are added up then the total is taken from the remainder (I don't add rent into this because rent is paid on the first and anything left after that's cashed is all that I have to work with so the only numbers I work with are post rent) which tells me what we have left for food, prescriptions, bus fare, et cetera. Each year of records gets its own worksheet so it's simple to go back and see what I paid, to whom, and when. Oh! And if someone chooses to do this, I highly recommend locking the Excel document with a password; especially if you happen to keep passwords documented with the sites you pay through. Also, I track how much I pay each month and the confirmation numbers of every payment. I can't tell you how many times it's come in handy when the cable company says they didn't receive my payment. :-/ I also created two reminders in MS Outlook. One pops up on the last day of the month to remind me to write and mail the rent check, another that pops up the day my husband's check is deposited which prompts me to pay off the rest of the bills. Oh, and one other pops up to pay the water bill because it's the only one that isn't on the same schedule as the rest. Ever so helpful! Attached is a screenshot of what a monthly section looks like. It's simple once you have it set up because copy/pasta and you're good to go for the next month! Maybe this will help someone who thinks they don't have enough money to bother keeping track. It still helps us see exactly where the money has gone and that's actually less depressing than being broke and not knowing where it all went. :-þ 3 agree Reply Just a quick tip – don't get too detailed in your categories! I realized I had a problem when we'd spent all our grocery money, but there was still plenty left in the 'Eating Out' category, so I was convinced that to stick to the budget, we couldn't cook (which makes no sense at all, logically speaking, if the budget is trying to save us money). Now it's all lumped into one 'Food' category, so how it works now is if we're ahead on dollars per day spent on food, we can eat out – if not we need to stay home and cook. I also tried to have a 'Clothes' category but I buy clothes so irregularly and infrequently that it didn't make sense. Now it's just my 'spending money' category and I can buy clothes or books or coffee or whatever, as long as it's for me and not household stuff. And another +1 for YNAB! Super motivating for me and I paid down my credit card debt faster than I ever thought possible, without a lot of pain or sacrifice. Now we're saving for a big vacation. Don't forget to read the blog. 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