How to Set Up a Budget in Five Easy Steps

Many people cringe at the thought of setting up a budget, but budgeting doesn't have to be painful. Contrary to popular opinion, budgets actually provide a great deal of financial freedom. How is that possible? When you live according to a budget, you set aside money regularly for necessities and other things that are important to you. Then, when it is time to pay bills or when you want to purchase a particular item, you have the money available to do so. No longer do you get stressed every time you need to purchase a particular item, because the money is readily available for it if you have budgeted properly. That's very freeing!

I've lived on a budget, and I've also flown by the seat of my pants financially. I'm now committed to budgeting because it's allowed me to build up my savings account and has actually enabled me to indulge in things I couldn't afford when I was spending my money without any plan.

Hopefully you're convinced that setting up a budget is worth it, but don't have a clue how to go about it. If that describes you, don't be dismayed! If you follow the five easy steps below, you'll be a budgeting expert in no time!

1. Track your expenses. Unless you know how much money you spend on various items, you'll end up budgeting unrealistic amounts of money for various categories. One of the most eye-opening and practical things you can do prior to setting up your budget is tracking every penny you spend, for at least a month. There are various ways to do this. You can carry around a little notepad with you and jot down what you spend and what you spent it on, or you can ask for a receipt for every purchase, even minor ones. I personally think collecting receipts is easier than writing everything down, especially since I'm given a receipt for almost every purchase anyway.

Whether you choose to jot things down in a notebook or use receipts as the way to track your spending, you'll need to get into the habit of recording your expenditures every day if possible, or at the very least three times per week. You may want to set up a spread sheet for this purpose. Create a column for each budget category such as food, auto expenses, clothing, utilities, rent, and so on. If you are not comfortable setting up a spread sheet, you can do the same thing on paper.

2. Compare your income with your expenses. Add up every bit of income you receive on a regular basis to come up with your total income. Compare that figure with what you spent in the month while tracking your expenses. Don't forget to take into consideration periodic expenses such as car insurance, taxes, clothing, etc. You may not have spent money on those categories during the month you tracked your spending, but they still need to be figured into your overall spending plan.

3. Make adjustments for inadequate income or extravagant expenses. After looking at your income and expenses, you need to ask yourself if your income is sufficient to cover the cost of your current lifestyle. If not, you'll need to make certain adjustments. Consider areas you can cut spending. For instance, if you generally eat out three times a week, you may need to reduce that to once or twice a week. If you get your hair cut every four weeks, you may need to decrease that to every six weeks and so on. Look at where you can cut cost, and do so, thoughtfully.

In some cases, you may need to take on an extra job for a season in order to pay off some debt to make your budget more manageable. An extra job should be a temporary solution, and will only work if you also cut back expenses in order to get your budget under control. If married, be sure to involve your spouse in this decision making process.

4. Determine how much you need for each budget category. To do this, look at what you spent while tracking your expenses, along with whatever decisions you made when comparing your income and expenses. No two budgets are the same, but some essential budget categories include housing, utilities, food, transportation, clothing, medical, and savings. You may balk at the idea of putting money into savings when you are strapped, but it is absolutely essential to put at least a small amount from each check into savings for those rainy days Grandma always talked about.

5. Implement the budget. Making a budget does no good unless you follow the plan you created. Be sure to regularly record what you spend on a spreadsheet or in a notebook. Keep a running total of the amount of money you have in all categories.

Some people find it helpful to use cash for some budget categories such as food, clothing, entertainment, and any other category where money is spent when out and about. If you go with a cash system for some budget categories, separate the cash either with envelopes or with different colored paper clips. The freeing thing about cash is that you know at a glance where you stand in each category, and simply put, when the money is gone in that category, you stop spending.

Finally, be prepared to make adjustments. It takes time to figure out exactly how much you need in each category, so you may need to tweak your budget a bit for the first few months.

Hang in there, be disciplined, make adjustments as needed, and in no time, you'll be a budgeting expert and be able to smile (or at least now scowl) when you sit down to pay your bills each month.