How to create a sound budget

In case you missed it, be sure to read our earlier article in this series on when to start budgeting.

One of the keys to successfully managing your finances is making and following a sound budget. Budgets can be an excellent financial tool with many benefits.  Not only can they help you control your spending each month, but they can help you save for goals, emergencies and the unplanned expenses in life. Ultimately, they can also help you make sure you’re not spending more money than you make – one of the keys to financial success.

Consider writing your budget down (or using a computer program), since a mistake some people make is trying to manage their budget “in their head”. Regardless of the program or tools you use when you make your budget, consider the following steps to creating a solid monthly budget and putting it into action.

Calculate your expenses. Get started by determining your expenses for the coming month. In order to create an accurate budget, it’s important to be thorough when calculating your expenses. It may help to look at bank or credit card statements from previous months. Don’t forget to take into account some unplanned expenses.

Once you’ve identified your expenses, it may be helpful to organize them into categories. For example:

  • Bills
    • Bills that are the same each month (car payment, rent)Image of a man sitting down and building a budget on his mobile tablet. Text overlaying the image says "Essentials for a Strong Budget".
    • Bills that change each month (utilities)
  • Other expenses
    • Food
    • Entertainment
    • Emergencies

Determine your income. Once you’ve calculated the amount of money you’ll need to get through the month, you can determine your income. In addition to the after-tax income from your salary or paycheck, don’t forget to include other potential sources of income such as rental income, interest, child support and alimony.

Crunch the numbers. At this point, it’s time to do some simple math. One way is to subtract your expenses from how much money you make. Ideally, this number should be more than zero. If this number is less than zero, you are spending more money than you make. If this is the case, you may need to look at your budget to identify what categories you could spend less on, or even cut out altogether.

Remember to be consistent.

A budget can become more effective when consistently followed over a long period of time. There may be months where your budget doesn’t go according to plan, but don’t give up. Remember that learning to master the process of budgeting can be a key to your financial success.

What are your tips for making a sound budget?

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