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How to create a workable budget

How to create a workable budget

The idea of creating a budget sometimes makes people throw up their hands in frustration, but it’s not as hard as it may seem at first.

Generally it’s hardest when you have no idea of what your expenses might realistically be — such as when you move out on your own for the first time. There are little things that might go unaccounted for, and those can throw a wrench into things.

To help with that, here is a list of expenses that people often have:

  • Housing (rent or house payment, rental insurance or homeowner’s insurance, HOA fees, lawn care, repairs)
  • Utilities (gas, electricity, water, trash removal)
  • Groceries (food and household supplies)
  • Personal care (haircuts, clothing, dental visits, doctor visits, annual exams, daycare if you have young children)
  • Pet care (food, toys & supplies, licensing fees, boarding, emergency vet care, shots & regular vet care, training, replacing or cleaning damaged household items)
  • Transportation (mass transit fares, car payments, car insurance, gasoline, parking fees, licensing fees, repairs)
  • Taxes (if self-employed)
  • Debt (at least minimum payments to credit cards and loans)
  • Savings & investing (ideally at least 10% of your income)
  • Communications (cell phone, home phone, internet service)
  • Entertainment (DSL, cable, Tivo, movies, events, dining out, classes, activities for kids, books, music, gadgets, travel)
  • Gifts (holidays, weddings, birthdays, charity)

(Note that you should ideally be having 10-15% of your pre-tax income going to retirement, but that’s another post.)

When you first create your budget, start by making a list of all the expenses you can recall and the amount you think that you spend on them. It may help to review your history on your checking account and credit cards, or the list above may jog your memory. Some people add a category for fun money as well, which is a set amount that doesn’t have to be accounted for in more detail.

Organize your expenses from most important to least important and add up the total.

(I placed the general list of expenses above in my idea of most to least important.) Note that “important” here equals more along the lines of “how negative will the consequences be if this item isn’t done?”. It’s not a values judgment, but of course the entire list is a personal choice. Your list might contain completely different items in a completely different order.

Next, make a list of your regular after-tax income. If you receive additional, irregular income, don’t worry about that for the moment. If you ONLY receive irregular income, generally you’ll base your budget off the lowest amount that you usually receive, or sometimes off the average amount. Add up the total.

Now compare your two totals. If your income exceeds your expenses, great. If not, figure up how many things you can pay with your existing income, and where in the list you need to start cutting and/or scaling back, or where in the list you’ll be using irregular income if it’s available.

This is often the reason that people avoid doing budgets — they’re afraid that their expenses will exceed their income (or they KNOW that their expenses exceed their income) but facing reality is the first step in feeling better. Once you know how your situation lies, then you can decide what to do about it.

Repeat this process every month. It’s perfectly normal for budgeting to be a mess at first, or wildly inaccurate. Tracking what actually happens each month will help with that, and gradually you’ll get it down. Just give it time, and pretty soon you’ll be controlling your money, instead of your money controlling you.


This post is part of a series. See what everyone should know about personal finance for links to additional posts on the subject.


View Comments (6)
  • I believe most people would say for all major expenses and bills you should put 60% towards, and like you mention 10%-15% towards retirement, and the rest can be scattered.

  • I’ve been keeping a weekly budget on an Excel spreadsheet for the last 14 years. I group the individual expenses under larger categories, keeping household expenses separate from credit cards, etc. This allows me to get a subtotal by category. I list the expenses down the left side, and the week ending date across the top from left to right. I have a separate sheet for each year. I can just copy the worksheet to create a new year, and do a pro forma projection based on the prior year’s expenses.

  • Thanks for the detailed example…my budget is going to change in the near future…I’m going to be a homeowner and no longer a renter. Good post!

  • Jamie, you’re right, that’s a good thing to add. I actually have it in my own plan but somehow I left it off the example.

  • @Corporate Barbarian- I use excel for my budget too! For me its the best way to keep track and with a few easy formulas, it does the work for you! Also, it’s a heck of a lot cheaper than buying a program like Quicken. Once upon a time, I thought coming up with a monthly budget would be stressful, but I realized that instead of adding stress it acutally reduces it. So much better to know where your money is going. Thank goodness I read the Power of Small and discovered that sweating the small stuff is the best way to deal with the big stuff! :)

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