A budget is basically a plan of all the expenses and income of a household or an individual over a predetermined period of time, usually one month. The purpose of having a budget is to plan before you spend and therefore be able to make sure that you have enough money each month to cover all your basic expenses. Once this is achieved, following a budget can help you achieve bigger financial goals like paying off debt, investing, saving and being able to afford high-ticket items or experiences. And it all starts with learning how to do a budget and do it well.
Learning How To Do a Budget
Learning how to do a budget is not nearly as complicated as it sounds. While it may seem at first that you need to be able to predict the future or to travel in the past to be able to write down the right amounts in your budget, these things aren’t really necessary. What is necessary for making and following a budget successfully is a systematic approach as well as consistency and determination.
Steps on Doing a Budget
The easiest way how to do a budget is to take it step by step. The process of doing a budget is comprised of four steps.
Step 1 to get a budget set up.
Make a plan of all your income and expenditures for the next month. The purpose of this step is to realize how much you are able to spend given your income and how that income
should be allocated across different expense categories, such as food, rent/mortgage, clothing, health, children, pets, etc. A lot of people think that Step 1 is the whole story when it comes to making a budget, but while it is the most time-consuming step, it is only one part of the process.
Step 2 of how to do a budget.
Denote all your actual expenditures over the same amount of time. Even though you are following a budget, you will probably not be able to stick to it completely. There might be unexpected expenses or you might spend less on some things than you previously thought. It is very important to keep track of your actual expenses so you are able to manage them better. When they learn how to do a budget, many people focus just on Step 1, and without being aware of Step 2 they quickly get discouraged when they are not able to stick to their budgets 100%. One of the most important things to realize is that the budget is a money management tool that incorporates all your foreseeable expenses and that can help you deal with unforeseeable ones (by showing you where you might divert funds from). The point in making a budget isn’t to foresee the future, but to manage it better. Thus, don’t be discouraged if your budgeted amounts don’t always equal the actual amounts – it’s normal.
Step 3 is key to how to do a budget well.
In this step, you put together the information from Steps 1 and 2. The purpose is to track and compare the budgeted amounts vs the actual amounts. At this step, don’t put the focus on unexpected, one-time expenses, where the actual expense is obviously different than the budgeted amount. Rather, you should focus on regular expenses and see how well you’re doing with staying within your budget. When it comes to expenditure on food, phone/Internet bills, childcare, clothing and entertainment expenditures, and similar, you should make sure to keep within the budget as much as possible.
Step 4 is quite easy.
It entails fine-tuning your budget using the information from Step 3. If you keep overspending in a certain category month after month then probably you should start budgeting in a larger amount. Or, if you have expenses that keep reappearing but aren’t explicitly included in the budget then you should include these as well for the sake of clarity and the benefits of planning ahead.
These steps cover the conceptual basics on how to do a budget. There are a lot of online budgeting tools that can make it even clearer and easier to make your own. You can easily find budgeting templates and premade spreadsheets that list most relevant expense and income categories and therefore make it very easy to get started with a personal budget.
There are free, basic versions and versions that cost a few dollars to download but offer graphical representation of your progress as well as tips on saving money by category. Whichever version you choose, make sure you stick with it. Don’t get discouraged if it takes a couple of months before you can anticipate your expenses correctly and allocate your money in a way that will bring you closer to your financial goals. And before you know it, you’ll become an expert on how to do a budget yourself!