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How to set up a budget

by Simi Brown

Created on: January 15, 2008   Last Updated: January 17, 2008

Setting up a budget may sound unpleasant or maybe even a bit intimidating, but it does not have to be this way. Whether you are looking to maximize the use of your money, or to pull yourself out of financial difficulty, creating and maintaining a budget is the most simple and practical solution. It is a tool that can help you to monitor how you spend your money so that you can get the most out of it, for today and for the future.

A BUDGET IN THREE STEPS

A budget is basically an itemized description of your income and expenses. When setting up a budget, there are three basic steps:

1. First you have to determine how and where you are currently spending your money.

2. Next, you must evaluate your spending habits and create future spending goals.

3. Finally, you need to maintain your budget to meet the financial goals you set for yourself.

If you have access to a personal finance software package such as Quicken or Microsoft Money, you can use these programs to guide you through the process, handle all the calculations, and even suggest areas of improvement. You should also consider doing your banking online.

If your finances are not computer-based, then you should gather your records and financial documents for the last 3 to 6 months. Make sure to include pay stubs, bank statements, withdrawal slips, canceled checks, and itemized credit-card statements.

We will now go through each step and explain how to implement it.

STEP 1: DETERMINE CURRENT SPENDING HABITS

In this first step the goal is to get an overall idea of how your money is being used by comparing your income to your itemized expenses.

First, you need to determine your total income. This will include any gross salaries, wages, and bonuses, as well as any interest and dividends from investments. Make sure to also include pension or Social Security allotments, tax refunds, rental income, child support or alimony payments received, and other similar sources of income.

If the pay you receive varies substantially from one month to the next, then try to come up with monthly average. Also avoid overestimating your income, and only include money you are certain that you will receive.

Next, take a look at your expenses. You need to itemize your expenditures and categorize them. If you have difficulty determining which categories to use, then look for a pre-made budget template (there are many of them available online), and choose the categories that are applicable to you.

Personal expenses usually fall into one of three general

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