How To Create and Stick to a Budget

You probably hate the idea of a household budget. However, a budget is a basic and important money-management tool for getting out — and staying out — of debt. So, if you’re serious about improving the state of your finances and avoiding future problems, you need to lose your antibudget bias. A budget is nothing more than a written plan for how you intend to spend your money each month, how much you’ll contribute to savings and retirement, and so on. A budget helps you live within your means. It doesn’t have to be scary. When you’re drowning in debt, a budget is your financial life raft.

Over time, if you stick to your budget and work on reducing your debt, your financial situation will improve. But even when your financial outlook is rosier, you should continue to manage your money by using a budget. Otherwise, you may get careless about your spending or begin using credit too much, and your debt may creep up to dangerous levels again.

Living on a budget also makes it easier for you to

• Build up your savings so you have money to fall back on if you’re hit with a big unexpected expense, if you lose your job, or if you have to take a pay cut.
• Purchase big-ticket items with minimal use of credit.
• Help make your family’s financial dreams come true: a new home, a great vacation, college educations for kids, a comfortable retirement.

Creating a monthly budget for your household is not a complicated process, but it can be time consuming. Simply stated, you need to do this:

• Compare your current total monthly spending to your current total monthly income.
• Reduce your spending as necessary so that it’s less than your income.
• Allocate your dollars appropriately so that you are able to pay all your living expenses and debts.

Categorizing your expenses

Creating an annual spending and income worksheet, like the one below, will help you organize your spending and income information and make sure that you don’t overlook anything. This worksheet will also come into play later in this budgeting process. The worksheet divides your spending into three categories:

• Fixed expenses: These expenses stay the same from month to month. Examples are your rent or mortgage, car loan, home equity loan, and insurance.
• Variable expenses: These expenses tend to vary from month to month. Examples are your groceries, gas, utilities, restaurant meals, movies, and books.
• Periodic expenses: These expenses may be fixed or variable. You pay them just once in a while, such as quarterly, every six months, or annually. Tuition, some kinds of insurance, property taxes, and dues are examples.

Some expenses listed as fixed on the worksheet may actually be periodic expenses for you. For example, instead of paying your auto insurance every month, you may pay it every quarter. After you’ve calculated total annual amounts for each of your debts and for all your living expenses, enter them on the appropriate worksheet lines.

Annual Income and Spending Worksheet

Comparing monthly spending and income

Now that you've completed the worksheet above, you can move on to comparing your monthly spending and income using the worksheet below:

1. Divide each of the annual dollar amounts in the annual worksheet above by 12 to come up with monthly amounts.
2. Make photocopies of the monthly spending and income worksheet below (so you can use it multiple times).
3. Record each monthly amount in the appropriate worksheet spaces below.
4. Review the dollar amounts and adjust them up or down as necessary so they’re as accurate as possible.
   1. For example, the cost of your auto insurance may be about to increase, your child’s tuition may be increasing next month, or your income may be decreasing. Always assume the worst scenario so that you build in a potential cushion.
   2. If your annual totals don’t include living expenses and debts that you should be paying but aren’t because you don’t have enough money, add them to your annual totals before you divide by 12. For budget-building purposes, you must have an accurate picture of all your living expenses and debts.
5. Subtract your total monthly spending from your total monthly income. Record that amount on the worksheet; it can be a negative number.

Monthly Spending and Income Worksheet