How to Create a Budget

Ah yes — the question we’ve been leading up to for the past 9 days: How to create a budget?

1. Make some coffee, and grab your notebook and a pencil.

You can use pen, but I’m just warning you right now, your notebook is going to get a little messy after you’re done. ;)

2. Get all of your documents together.

Go back to Day 4 — remember when you gathered in all of your financial documents together? We’re going to need them today.

3. Determine what your monthly income is.

This may include a paycheck, a spouse’s paycheck (if you guys share a budget), bank interest, side business money, or gifts from your parents. Write down the income categories and add up the monthly amounts. Note: some people don’t have a steady monthly income, so if you work a flexible job or don’t have a consistent paycheck, take an average or the minimum amount you normally get in a month to use as your income.

4. Write down everything you are under contract for.

This may include your car payment, student loan minimum, credit card minimum, water bill, rent/mortgage, health insurance, cell phone, cable, internet, alimony… anything that if you didn’t pay for it, you would be charged a fee or would be breaching a contract.

5. Subtract that amount from your monthly income.

Is there a lot left? That’s what you’ll use for other monthly expenses, saving/paying debt, giving and discretionary income.

6. Figure out your saving and/or debt goals.

Go back to Day 3 — which financial step are you on? If you’re trying to save $1,000, when do you want that completed and how much a month will you need to allocate to reach that goal? Before determining the other buckets, I would recommend putting down your ideal savings and/or debt goals. So, if you want to pay off your credit card in a year, that would be $X per month. Take this out of the remaining money from #5.

7. Assign the rest.

After you’ve figured out your contracted stuff, your goals, now it’s time to determine the other buckets — your groceries, dining out, entertaining, gifts, clothes, etc. This is the portion of your budget that will be the hardest to stay under control because it can change month to month. For example, I have three family members with birthdays in March. That’s a lot of gifts!

8. Assess the budget.

After you finish assigning things, how does the total match up to your monthly income? Are you over budget? Where do you need to cut back? I would recommend evaluating the stuff under step 4. Do you need to have a DVR? Do you need to have a monthly subscription to ESPN online? Were you over-zealous on your saving goals? This is the part that takes a little trial and error as you live through the month and figure out what works and what doesn’t.

Budgeting Resources: Mint is a great online budgeting tool (it’s actually what J and I use on a regular basis), Quicken is a good computer software to help, and here are a few free worksheets you can use from Dave Ramsey’s site.

Below is a recommended percentage rule for create your budget. Now, there are exceptions. For example, if you are bringing home $10,000 a month (I can’t even fathom that amount!), then you obviously don’t want to be spending 10% on food, unless you live in New York and eat at fancy restaurants every night.

It also depends on where you live. J and I spend about $250-300 on gasoline each month, but rarely spend anything on mass transit because we don’t live in a big city with a major bus or subway route. But another person may have a shorter or longer commute so your percents will look differently. You get the idea.

Recommended Budget Percents:

Charitable Gifts: 10-15%
Saving: 5-10%
Housing: 25-35%
Utilities: 5-10%
Food: 5-15%
Transportation: 10-15%
Clothing: 2-7%
Medical/Health: 5-10%
Personal: 5-10%
Recreation: 5-10%
Debts: 5-10%

Want to see what my budget looks like? Here ya go!

Which part of the budget process is the hardest for you?
*For me, it’s definitely the second to last step, assigning everything else. In fact, I actually have an “everything else” bucket so I don’t kick myself if I spend more in one area than another. Read this post to learn more about that.

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