With our website being focused primarily on finance and budgeting, we thought it is only logical that we make one of our first articles about budgeting. More specifically, how to create a budget, for those who have never created one.
You can do the budget either on a piece of paper, or on the computer using Excel or other spreadsheet programs. But using Excel or a similar computer program, it would make things so much easier, as you are able to change numbers with ease. A paper-based budget would make things very hard to change and calculate.
1st step: Decide on your budget cycle
Do you get paid every two weeks, as most people do? do you get paid once a month? or maybe every 1st and 15th of the month?A cycle is how often you get paid. Depending on how you get paid, that is how you will divide your budget cycle. So if you get paid every two weeks, you could divide your budget in two sections, with the first section getting the first pay and the second getting the other one. Or , you can simplify it and make one monthly budget cycle.
2nd step: Mark down all your fixed expenses
Jot down all your weekly or monthly expenses, including utilities, GYM membership, car bills etc. Beside each item, include the monthly amount.
3rd step: Write your variable expenses and how much to allocate
These could include any item that changes, like personal spending, gas, grocery shopping etc. And more importantly, once you decide what your variable expenses are, decide how much money to allocate to each. Since these are not fixed items and can change, you will have to do your best to approximate the totals. For example, assuming your budget cycle is bi-weekly, you will have to decide-based on prior experience and spending-how much money you need to allocate for gas. Of course, these numbers can always change as you go.
4th step: Deduction for Savings
Saving money is so important, I have dedicated a special step for it. Remember, ‘Pay yourself first!’ Create a category in your budget and call it ‘Savings.’ Decide how much you would like to save from every cycle, or on a monthly basis.
5th step: Calculate all your ‘After-tax’ earnings
How much do you make from work and other sources? include it all, after taxes. If your pay is variable or depends on commissions, you will have to do your best effort to come up with a close figure of what your ‘net income’ is.
6th step: Put it all together
Start inputting all the numbers together, with a description beside each one. Put all the expenses on top of one another. Below all the expenses, input your ‘net income’ and subtract the ‘expenses’ from ‘net income’ like this
-Total Expenses =
-Net Income =
(Net Income – Total Expenses) = Leftover (Positive or Negative?)
That is it!
If after you subtract your total expenses (fixed and variables) from your net income, and you still end up with some money, congratulations, your budget is efficient enough to produce extra leftover money. In fact, if you have extra money, you could create another cell just below everything else and call it ‘Leftover’ If you have leftover money from your budget cycle, you can either roll it over to the next cycle and allocate it to your ‘Savings’, ‘personal spending’ or any other category that needs some funds.
On the other hand, if subtracting your expenses from your net income puts you in the negative, you will have to go back to your budget and revise the numbers. Obviously, you will not be able to touch your fixed expenses, since these are mandatory and can’t be changed. Instead, look at your variable expenses such as your ‘grocery shopping’, ‘personal spending’, ‘gas’ etc. Naturally, you will draw money from a variable expense that is flexible enough to reallocate to something else and bring your budget leftover to above zero.
This is why Excel or a spreadsheet is much easier, as it enables you to do these number manipulations and ‘What if’ scenarios much easier and faster.
Change and revise as you go
These numbers-except for the fixed items-will not stay the same. In fact, your very first budget is a mere blueprint. A fill-in-the-blank template for what should go on the budget, with the numbers to be filled out or revised later. In my own budget, I tend to review and revise my budget every 3-6 months, or whenever I have new sources of income, a salary increase etc. The key priorities are to pay your fixed items first and allocating money for your savings. It is also a good idea to create another item in your budget for ‘Emergency’, where it would be different from your ‘Savings.’ Use money from this ‘Emergency’ fund to pay for unexpected necessity such as house or car repairs, random infrequent bills etc.
Coming up in the future, we will expand on the topic of creating and revising your budget, and how to set up ‘Envelope Budgeting’
Yours in financial success,
Follow us on Twitter: @BudgetSense_ca