How to Create a Budget

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Think creating a budget is overwhelming? Just follow these steps.

Difficulty:

Moderate

Instructions

Things You'll Need

• All of your monthly bills
• A calculator
• Perhaps a copy of your most recent paycheck stub or W2 or 1099 form

1. Creating a budget is simply a matter of matching up your cash inflows against your bills on a monthly basis. This simple procedure begins with a comprehensive assessment of your total monthly expenditures. Both of these lists are then broken down into two categories: fixed and variable expenses and income.

2. The list of fixed expenses includes such things as rent or mortgage payments, property taxes, car payments, utilities (this may go on the variable list depending upon how much your utilities fluctuate) and other miscellaneous fixed expenses.

3. The variable component of your expenses will consist of things like food, entertainment, gas and car maintenance, unreimbursed medical bills, music lessons for the kids, vacations and other incidentals too numerous to mention.

4. Of course, the fixed component of your income will usually consist of your paycheck(s). But of course, other sources of income, such as retirement plan or IRA distributions, Social Security checks or disability income must be counted here as well.

5. Finally, the variable component of your income must be considered, if there is any. Income from odd jobs, lump-sum distributions, inheritances (if one is expected), income tax refunds and other irregular sources should be estimated and totalled as accurately as possible.

6. Match the fixed income up with the fixed expenses. If your fixed expenses exceed your fixed income, then you're in trouble already. Those in this position will need to do something to increase their income, such as get a second job (or a first one). Unless, of course, you have a source of variable income that makes up for the shortfall.

7. The tricky part of most budgets is being able to anticipate those financial setbacks that inevitably arise, such as major car repairs and medical bills. The first line of defense against such unexpected expenses is obviously an emergency reserve fund. Variable income, such as an income tax refund, can be used for this purpose.