How to Create A Workable Budget in 10 Hours

BlogHer Original Post

Budgeting is a fact of life. Companies have a budget. Charities have a budget. Governments have a budget (though they often exceed it). Your household should have a budget too - one that is workable and sustainable. Budgets often bring up feelings of fear or boredom in people. Having, and following, a sustainable budget is essential to a strong financial foundation.

Some people prefer to call their budgets "spending plans" to lessen the negative connotations. Whatever you call it, the key is to establish a planned allocation of limited resources, so that you can put money towards what you most prioritize, and live a life free from debt collectors or constant late fees.

Making a household budget (or spending plan) doesn't have to take long. At it's core, a budget is made of 3 steps: Know What You Make, Know What You Spend, Evaluate The Difference. By breaking down the tasks into manageable hourly increments, you can create a workable budget in 10 hours or less.

Know What You Make (2 hours):

Get your pay stub and figure out how much you bring in, net of taxes and retirement contributions, a month. If you also earn money from secondary sources such as another, spousal support, dividends, etc., include that income as well. For freelance work, include only 60% of your total paycheck, because the other 40% should be set aside for taxes to avoid an unpleasant April surprise. 

If you have variable income (for example, if you are a full-time freelancer), this step might be a little more challenging for you. You can take an average or median of your 12 months earnings. The key is not to let the really great months set the benchmark for what you make every month, especially if the economic demand for your work has changed. 

Know What You Spend (4 hours):

Gather all your financial documents that lists the amount of your major financial obligations, such as mortgage payments, student loan payments, outstanding medical payments, and credit card bills. Also include the information for other, recurring expenses such as utilities payments, internet / Cable / DSL payments, gym memberships, etc.

Estimate the amount you spend on discretionary items, such as clothes, shoes, entertainment (movies, happy hours, dance classes), and food (groceries and dining out). It's okay if you don't know the exact amount. Make an educated guess to the best of your ability. If you are a married couple, it would be helpful to talk through this section so that you don't miss any information.

Evaluate The Difference and Plan For Changes (4 hours):

Set up the 3 major categories in a spreadsheet (Excel or OpenOffice), or simply on paper. The 3 categories should be Fixed Expenses (expenses that are same month over month, i.e. mortgage, rent, or student loans), Variable Expenses (expenses that fluctuate, i.e. food, clothes, utilities), and One-Time Expenses (expenses that come once or twice a year, i.e. vacations, new laptop purchases, etc.). 

Plug in the numbers accordingly. Add up all your expenses, then compare that number to your income number. If your spending is higher than your income, then you must start making adjustments. Take a look in each of the categories to see where you can make the most difference. Perhaps try decreasing dining out expenses by 20%, or canceling Cable, or switching to a lower cost cell phone plan.

Use the new, planned spending numbers as your starting point for the next month's budget.

Relevant Links:

How to budget with Irregular Income [Lynnae @ Being Frugal]

Create a simple spending plan [Beth @ My Simple Life]

Benefits of budgeting [Peter @ Our Sweet Home]

How to make a spending plan [Wall Street Journal] Savvy Living Through Personal Finance


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