How to Create a Budget

How to Create a Spending Strategy

I recommend that you enter the data for your spending strategy on a spreadsheet or in a financial program, but a piece of paper will work just fine too. The first task is to estimate your monthly after-tax income. For some this is easy because you receive a regular paycheck. For others who are paid on commission or who are self-employed, you’ll need to come up with a realistic monthly estimate.

Document Your Fixed Expenses

The second task is to enter all of your fixed monthly expenses below your income. Fixed expenses, such as rent, a mortgage, or home utilities, are those recurring costs that you must pay every month because they’re vital for your well-being or are commitments you’ve already made. Label each category or payment on a separate row. Don’t forget to account for any automatic payroll deductions that you may have for workplace insurance or savings to a retirement plan. Some fixed expenses you don’t actually pay for in equal amounts each month, so come up with a monthly average. For example, if you pay insurance just twice a year, calculate the annual amount you pay, and then divide by 12. Or if your utility bills fluctuate a lot, research the total you paid for a full 12 month period and divide by 12.

Estimate Your Variable Expenses

The third task is to enter all your variable monthly expenses below your fixed expenses. Variable expenses are those that can change each month or are discretionary. Dining out, buying clothes, groceries, a haircut, etc. could be some of your variable expense categories. Try to think of all the ways you spend money. Maybe going to the movies or to a local coffee shop are black holes for your money. If so, be sure to create separate categories just for them. Enter your actual expenses from at least three previous months by looking at charges in your checkbook register or bank statements. If you don’t have these, you’ll simply need to start tracking your expenses going forward.

When you subtract your monthly fixed and variable expenses from your monthly after-tax income, what you have left-over is called your discretionary income. It’s an important number because it’s what you have topay down debt and build wealth for the future. The obvious goal is to make that number as big as possible. That can be accomplished by increasing your income or by decreasing your expenses, or by doing both.

Administrative

To hear much more about how to create a spending strategy that’ll help you reduce expenses and save more money, get your copy of Money Girl’s 10 Steps for a Debt Free Life from Audible.com or in the iTunes store.

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I’m glad you’re listening. Chi-Ching, that’s all for now, courtesy of Money Girl, your guide to a richer life.