If you want to keep your spending under control, it's essential that you make a budget. A budget allows you to get a handle on the flow of your money—how much is coming in and where it goes out. With that information in hand, you can make intelligent choices about how to spend.

Make a List of Your Expenses

The first step in making a realistic budget is figuring out where your money goes. To keep track, you should make an expense record. You may be tempted to turn to a computer program, such as Intuit's Quicken, to keep track of your expenses. That may seem like an easy way to approach the task, but most of these programs have a significant shortcoming—they don't record your cash outlays. Computer programs have you analyze your expenses paid primarily by check or credit card, overlooking the most obvious source of payment—cash.

Rather than relying on a computer program, you can keep track of your expenses in a low-tech but comprehensive way: with some paper and a pen. Here's how:

1. Take out eight sheets of paper. You will use one sheet per week, meaning you will record your expenses for two months. By doing this, you'll avoid creating a budget based on a week or a month of unusually high or low expenses.

2. Select a Sunday to begin recording your expenses.

3. Record that Sunday's date in the blank at the top of one sheet of paper.

4. Carry that sheet with you at all times.

5. Record every expense you pay for by cash or cash equivalent—check, ATM or debit card, or automatic bank withdrawal. When you make a payment on a credit card bill, list the items paid for.

6. At the end of the week, put away the sheet and take out another. Go back to Step 3.

7. At the end of the eight weeks, list seasonal, annual, semi-annual, or quarterly expenses you incur but did not pay during your two-month recording period. The most common are property taxes, car registration and maintenance, magazine subscriptions, tax preparation fees, insurance payments and seasonal expenses such as summer camp fees or holiday gifts.

Total Up Your Income

Your expenditures account for only half of the picture. You also need to add up your monthly income.

On a blank sheet of paper, list the jobs for which you receive a salary or wages. Then, list all self-employment for which you receive income, including farm income and sales commissions. Finally, list other sources of income, such as the following:

• bonus pay
• dividends and interest
• alimony or child support
• pension or retirement income
• public assistance

Next to each source of income, list the net (after deductions) amount you receive each pay period. If you don't receive the same amount each period, average the last 12.

Next to each net amount, enter the period covered by the payment—such as weekly, twice monthly (24 times a year), every other week (26 times a year), monthly, quarterly or annually.

Finally, multiply the net amount by the number of pay periods to determine the monthly amount. For example, if you are paid twice a month, multiply the net amount by two. If you are paid every other week, multiply the amount by 26 (for the annual amount) and divide by 12.

When you are done, total up all the amounts. This is your total average monthly income.

Make Your Budget

After you've kept track of your expenses and income for a couple of months, you're ready to create a budget. Your twin goals in making a budget are to control your impulses to overspend and to help you start saving money. Follow these steps:

1. Determine the categories into which your expenses fall (see the chart below for suggested categories). List your categories of expenses down the left side of a piece of paper (or Excel spreadsheet). Use as many sheets as you need to list all categories. These are your budget sheets.

2. On the sheets containing your list of categories, make 13 columns. Label the first one "projected" and the remaining 12 with the months of the year. Unless today is the first of the month, start with next month.

3. Using your total actual expenses for the two months you tracked and the other expenses you added, project your monthly expenses for the categories you've listed. (Make a note of when smaller expenses, such as magazine subscriptions, are due so you can adjust your budget for that month. These temporary adjustments make more sense than trying to save $1.23 each month so you can pay for your magazine subscription once a year.)

4. Enter your projected monthly expenses into the “projected” column of your budget sheets.

5. Add up all projected monthly expenses and enter the total into a “Total Expenses” category at the bottom of the projected column.

6. Enter your projected monthly income below your total projected expenses.

7. Figure out the difference.

If your expenses exceed your income, you will have to cut expenses or increase your income. One way to do this is to make more money—but let's assume that you are not likely to get a substantial raise, find a new (higher-paying) job, take on a second job, or make significant money by selling assets. This means you must decrease your expenses—without depriving yourself of items or services you truly need.

Review your expenses with an eye toward reducing. Rather than looking to cut out categories completely, look for categories you can comfortably reduce slightly. For example, let's say you need to cut $175 from your budget. You had planned on spending $100 a month on meals at restaurants, but are willing to decrease that to $50, thereby saving $50.

Try making a list of things you feel you can't live without, and whittle down your other expenses to accommodate them. For example, you may decide to give up most of your magazine and newspaper subscriptions because you know you'd go nuts if you couldn't go to the movies once a week. If you make room for at least some of the things you love most, you're much more likely to succeed at your plan.

Staying on Track

Don't think of your budget as etched in stone. If you do, and you spend more on an item than you've budgeted, you'll only find yourself frustrated. Use your budget as a guide. If you constantly overspend in an area, you need to change the projected amount for that category—without berating yourself. Then you'll have to trim that money from another category.

Keep in mind that a budget is designed to help you recognize what you can afford; it's not just an exercise in filling in the “correct” numbers. Check your figures periodically to keep an eye on how you're doing. If you never have enough money to make ends meet—you're using credit cards and not paying the balance in full each month—it's time to adjust some more.

If you continually come up short, you may need to consider some larger changes. For example, you might sell your newer car for an older used car to free yourself from car payments. As you make adjustments to your budget, give careful thought to your priorities. Everyone has different ideas about what luxury is and different feelings about what they're willing to give up and what they just can't live without. Think about what you value, and be honest with yourself.

You may have to sacrifice some things that feel important to you, but don't expect to stick to your budget if you've taken away funds for almost everything beyond food, shelter and bills for your mundane necessities. Be realistic.

Categories of Expenses

Home
rent/mortgage
property taxes
homeowner's insurance
homeowner's association dues
telephone
gas & electric
water & sewer
cable TV
Internet service
garbage
household supplies
housewares
furniture & appliances
cleaning
yard or pool care
snow removal
maintenance & repairs

Food
groceries
breakfast out
lunch out
dinner out
coffee/tea
snacks

Wearing Apparel
clothing & accessories
laundry & dry cleaning
mending

Self Care
toiletries & cosmetics
haircuts
massage
health club membership
donations

Health Care
insurance
medications
vitamins
doctors
dentist
eyecare
therapy

Transportation
insurance
road service club
registration
gasoline
maintenance & repairs
car wash
parking & tolls
public transit & cabs
parking tickets

Entertainment
music
movies & video rentals
concerts, theater & ballet
museums
sporting events
hobbies & lessons
club dues or membership
film development
books & magazines
newspapers
software

Dependent Care
child care
clothing
allowance
school expenses
toys & entertainment
health care

Pet Care
grooming
vet
food, toys & supplies

Education
tuition or loan payments
books & supplies

Travel
Gifts & Cards
holidays
birthdays & anniversaries
weddings & showers

Personal Business
supplies
photocopying
postage
bank & credit card fees
lawyer
accountant

Taxes

Insurance

Savings & Investments

Copyright 2008 Nolo

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