Baby Steps to Get Your Financial House in Order – Create a Budget

This post is second in a series that outlines baby steps to getting your financial house in order. In the first post we covered Know What You Spend.

Today’s post is probably the most important. If your goals are the destination (such as early retirement, a new car, that dream vacation), consider your budget to be the roadmap or GPS system. Without it you may still reach your destination, but it’ll take you a lot longer to get there.

I know, you may be thinking a budget is too tedious and not worth the effort. But managed correctly, you’ll only need to spend a few minutes a week on your budget. And the benefits are immense:

• Always know where you are with your income and expenses
• Less stress, know where your money is going and how much you have left over
• Track and reach goals

Ultimately, you’re deciding to manage your money, not to let your money manage you.

Let’s get started!

Create a Budget

There are numerous tools available to help you craft a budget. My personal preference is Excel. I use the zero-sum budgeting method. This method accounts for every dollar of income and requires adjusting some part of the budget downward for every other part that needs to be adjusted upward. You can download for free my monthly budget worksheet and customize it to match your income and expenses.

1. Pull out your list of expenses that you compiled in Step 1.
2. Add your net income and expenses to the monthly budget worksheet. The budget provided may cover all of your categories or you may need to customize it.
3. Look at the bottom of the spreadsheet (it’s done the math of subtracting your expenses from your income). Does your income exceed your expenses? Great! You’re off to a good start. If your expenses exceed your income then it’s time to cut your costs.
   • First look at variable expenses like food, entertainment and clothing. These are the easiest to trim and are usually the most bloated line items in a budget.
   • Next look at services such as cable and cell phone, can you cut or lower your level of service?
   • Also look at insurance policies such as home owners or renter’s and car insurance. Shop around for lower premiums, you’ll most likely find them. Look into raising your deductible, this may or may not have a worthwhile impact on the cost but it is worth checking. Also check to see if you are paying for items, like roadside assistance or rental car, that you may not need if you already have AAA or a spouse with a second car.
   • If you’re still coming up short you’ll need to look at taking more drastic cuts or you may need to look at ways to increase your income like renting out a room or getting a second job. Just remember, it’s easier to save a dollar than it is to earn a dollar so be creative and look for ways to save.

Now you have a budget in place, time to follow it. Remember, a budget is a work in progress. It is a tool to help you achieve your financial goals.

• Find a way to maintain it on a regular basis – I update mine at least weekly.
• Adjust it when necessary, it’s not written in stone.

Tagged as: Budget, Financial Tools, Monthly Budget Worksheet