A Budget You Can Live With

Creating a road map for your spending will help you reach your destination.

Contrary to popular belief, budget is not a dirty word. Many people dread creating and following a budget, but a budget is an essential tool for maintaining your financial well-being. A budget will help you avoid financial pitfalls, and, ultimately, a whole lot of stress that can negatively impact your health and your life.

What is a Budget?

A budget is a list of all expected income and expenses. It is a plan for spending and saving. Creating a budget is a way of imposing a structure on your finances so that you can live within your means, avoid debt, and hopefully save money.

Some people create a budget only after finding themselves deep in debt—and this is a great way to start the process of digging out of debt. However, a budget is not just for people faced with debt; we can all benefit from living within a budget.

Why Budget?

Living without a budget is sort of like trying to drive from Seattle to Boston without a road map—you’ll eventually get there, but you’ll probably make several wrong turns along the way.

A budget is your road map to financial responsibility. Having a budget gives you a plan to follow. It allows you to be very intentional about your spending. When you have a budget, you’re less likely to spend frivolously or mindlessly.

Some people create a budget to reach a specific goal—such as getting out of debt or saving for a new car. But, it’s also great to have a general household budget to help you stay on track—this way you won’t have to worry about bounced checks at the end of each month and you’ll be able to live proactively rather than reactively.

Creating a Budget

A lot of people avoid creating a budget because it seems like a daunting task or because they are afraid of facing the truth about their finances. The best way to overcome that resistance is to just dig in and get it done.

Here’s what you’ll need to gather:

  • Bank statements
  • Investment statements
  • Copies of bills
  • Income information

You may wish to use a budgeting tool such as a financial planning worksheet, financial software (such as Quicken), or an online financial planning site (such as mint.com). However, you don’t necessarily need anything other than your income and expense information and a notepad and pen.

Start by listing your expenses and income.

Monthly Expenses: Your list may include housing, car payments, auto insurance, utilities, groceries, tuition, gas, gym membership, debt payments, savings, and more. Use your old bank statements and check register to jog your memory for expenses you may be overlooking. If you have expenses that you pay annually or semi-annually, divide by 12 to calculate the monthly cost to you.

Monthly Income: Record all sources of monthly income. Include only guaranteed income. You may be hoping for a bonus, but it’s not a sure thing, so keep it out of the budgeting process.

Next, take a deep breath, tally up your totals and take note of the results.

  • Positive Cash Flow: With any luck, your monthly income exceeds your monthly expenses. This is great news—it indicates that you are living within your means and that you also have an opportunity to save for your future. Your budget is going to allow you to be proactive and help you avoid falling into debt.
  • Negative Cash Flow: If your expenses exceed your income, don’t despair—that’s why you’ve created a budget! Your budget holds the key to changing your spending habits and eliminating debt. Read on to learn how.

Balancing the Budget

Whether you have a positive or negative cash flow, you can use your budget to make adjustments to your spending. Look at your budget. Really—step back and look at it. Your budget likely includes non-negotiable, fixed expenses such as rent or auto insurance. These expenses stay the same every month and are usually essential. (No one is going to ask you to forego housing!) Your budget will also include some variable expenses. These are expenses that change from month to month such as groceries, gas, entertainment, and more.

Variable expenses provide opportunities for tweaking your budget. Can you reduce your grocery expenses? Perhaps you can start carpooling to share the cost of gas. Or maybe you’ll cut back on eating out in favor of more affordable meals at home.

Only you can decide where you’ll make the changes. The point is—the budget gives you the big picture or the view from above, so to speak. Most of us don’t realize how much frivolous spending we do until we see it on paper. The budget is your first step toward eliminating mindless spending.

Living within the Budget

Budgeting takes practice. In the beginning, budgets usually need to be adjusted several times before they’ll serve you best. Sometimes it takes several months before you have a reliable working budget. Be patient. Continue to track your expenses. And congratulate yourself for living intentionally. That budget is a road map that’s going to take you places!