Creating and Working with a Budget

Creating a budget means building a plan for how you intend to spend your money.  A good budget will help you manage your money and save for important expenses.  Though the word budget has taken on a more negative connotation over the years invoking an image of pinching pennies or limited spending, a budget is really just a tool—and a great tool at that—to gain better and more accurate insight into your spending habits

Effective money management starts with a goal and a step-by-step plan for saving and spending. Your budget should be flexible - your needs will vary from month to month and year to year - and realistic.


The Budgeting Process

  • Step 1: Assess your personal and financial situation

    Where does your money come from?

    1. List your current source(s) of income.
    2. What do you expect to be your source(s) of income in the near future?

    Where does your money go?

    Prioritize spending by analyzing where money goes.  Review spending for any small, recurring purchases that you may not have noticed were adding up—such as the amount spent at vending machines.

    Record every penny spent in a spending diary

    Begin today by keeping track of what you spend your money on. Keep track for one week. Try it for four weeks. An easy way to do this is to commit to use only your debit card for a period of time.  At the end of the time you'll have an online record in the form of your bank statement that will show you exactly what you spent your money on.  


    Evaluate your findings

    1. What patterns can you see in your spending habits?
    2. How do you decide what to purchase?
    3. What factors do you think influence your purchasing decisions? 

    Review your needs vs. wants

    List some of your needs and wants and then review your list and think about what is really important to you. Consider which items on your list have lasting value.  Ask yourself if you really need or want everything on your list. Put a star next to the items you believe you cannot do without.  Check to see if some of your needs are really wants. Cross out the least important wants. 

    10 Ideas for Cutting Expenses

    1. Buy what you need. Consider if what you are buying is a “need” or a “want.” Do not succumb to peer pressure—stick to your spending plan.
    2. Get organized. If you keep your paperwork and life organized, you can keep from wasting money on costly speeding tickets, parking tickets, bounced checks, late payment fees, and more.
    3. Use discounts. Use coupons, customer rewards, student discounts, and the like.
    4. Cut costly habits. Smoking, coffee drinks, eating out, lottery tickets, and prepared foods are all expensive things you can do without.
    5. Buy used. Search for used furniture, sporting goods, clothing, electronics, and more at thrift stores, garage sales, flea markets, and reliable online auctions.
    6. Shop smart. Make a shopping list and stick to it; buy nonperishable staples in bulk; opt for generic brands for over-the-counter medicines, food, toiletries, and cleaning supplies; never pay full price for clothing and shoes.
    7. Eat smart. Save money and eat healthier by packing your lunch, jazzing up leftovers for dinner, cooking dinner rather than buying prepared foods, and stocking up on snacks to avoid vending-machine purchases.
    8. Entertain for free. Seek out free and low-cost entertainment options such as DVDs from the library, free movies and concerts in your community, high school and minor league sporting events, playgrounds at parks, and recreation centers. Limit song, ringtone, and app downloads.
    9. Inhibit impulse buying. Follow the 24-hour rule when making major purchases so you have time to think. For smaller purchases, try putting items you want on a 30-day list; review the list at the end of 30 days to see if you still want them. Remove your credit card number from online accounts so it’s harder to make online purchases.
    10. Call and cancel. Go through your bills and think about what you cancel. You might find everything from unread magazines, unused gym memberships, unwatched cable channels, and unused cellphone services. Call the companies to cancel the service or attempt to renegotiate.


  • Step 2: Set personal and financial goals

    Goal setting is a major component of both personal and financial development. To achieve your goals, you must focus on them. 

    Goals can generally be divided into three durations:

    • Short-term goals: Three months
    • Medium-term goals: Three months to a year
    • Long-term goals: Within one year or more


    Remember to use the SMART system; Specific, Measurable, Achievable, Realistic, and Time-bound. For example:

    • Specific: I need a laptop computer for school.
    • Measurable: The laptop I want is $500.
    • Achievable: I need to save $60 per month.
    • Realistic: I can earn an extra $15 per week by babysitting for a few hours.
    • Time bound: I need the laptop for when I start school in one year.


    First, think about short-term goals—those you can reach in about three months. These might include saving enough money for holiday presents, taking yourself to the beach for a day, or going out with your friends.

    Then, consider medium-term goals that can be reached in three months to about a year. These might include trading in your car, purchasing a new computer, or saving up to put a down payment on an apartment.

    Finally, think about long-range goals that are more than a year away. Perhaps you are hoping to attend graduate school, start a business, or buy a home.

    When you reach your first goal, re-evaluate and add new goals to your list. Then begin working toward accomplishing your next goal!

  • Step 3: Create a budget

    Now you are ready to begin listing all of your sources of income against all of your monthly expenditures (from required expenses like mortgage or rent payments to discretionary spending like eating out or going to the movies).  You'll begin to get a true picture of your personal cash flow, which will allow you to make better and more informed financial decisions. An accurate budget will also help you to answer that ever elusive question, "Can I afford it?"

    Here is a budget worksheet created in Microsoft Excel that attempts to list possible sources of monthly income as well as expenses. As everyone's financial situation is different, you may find that not every category is applicable to your income or spending. You may even find that some months are different than others, but you should find through going through this exercise you are better prepared for those changes and even accounting for unanticipated expenses.

    Though a monthly budget is generally the most reasonable timeframe for which to set up an initial personal  budget, there are many sources of income and expenses that do not perfectly follow a monthly schedule.

    For instance, you may receive a paycheck every week or two weeks, not once a month. In that case, you will want to calculate how that adds up over one month's time and write that in the appropriate row and column. You may also have certain expected or even recurring expenses that occur more or less often than monthly.

    To account for those expenses (like car insurance) in your monthly budget, simply calculate the total expense for the calendar year and divide that by 12 in order to find the "monthly" expense. Write that number in the appropriate row and column. 

  • Step 4: Review financial progress and revise budgeted amounts

    After the first month, you should review your budget and determine how your actual numbers are comparing with your anticipated numbers.

    Review how much you actually earned and how much you actually spent. If there is a difference between what you expected to earn and/or spend and what you actually earned and/or spent, carefully examine the differences. Make whatever adjustments are necessary on next month’s budget. You will soon become skilled at developing a sound budget and it will help you reach your long-term financial goals.

    Do you have money left over? If so, go back and increase your monthly saving expenses to build financial security.

    Are your expenses greater than your income?

    • Review your expenses:
      • Are there any that you can cut out completely?
      • Which expenses can you possibly decrease?
      • What will you actually do to cut expenses?
    • Review your income. Is there any opportunity to increase your income?