How to Make a Budget

In order to start to unleash the benefits of using a budget, you need to understand how to make a budget. The steps to creating a budget are to analyze your income, determine where your money goes, categorize expenditures, budget the variable expenditures and to monitor the budget crashers.

Analyze Your Income

How much money does your family have coming in and where is it coming from? On the income part of your budget, list any monthly income coming from salary (gross salary), interest earned, dividends received, and any other income sources that provide monthly income. This is your monthly gross income.

Unfortunately this isn't what you make, because as you know all to well, your paycheck doesn't make it home in its entirety. From this gross income we need to take out the amount that is taken out of your check, like taxes, FICA and other withholdings.

Check your previous pay stubs to find out what these numbers are and subtract them from your gross income to get your monthly net income.

This new number is your net income. It comes in the form of a paycheck and finds a home in your bank account. So this is the number that represents what you make, right?

Wrong.

You only make what you have control over, and we're not quite at that number yet. To find out what you make, first we need to define your expenses.

Defining Expenses

There are two basic categories of expenses, fixed and variable. Defining your expenditures as part of these two categories will help you finally get to the real dollar amount you make.

Fixed Expenses

First you need to take out of your fixed expenses, the ones you can't change and that come out every month. These include house payments, insurance, car payments, car insurance, etc.

This number should also include the savings dollars that you need to make in order to reach your retirement goals. These aren't optional savings. You must make those in order to retire, s consider them fixed expenses.

The goals you set for your retirement is the key to knowing what that number is, and once you are set on that number, that becomes a fixed expense.

So after you've taken out all of your fixed, mandatory expenses, you have come to the real number you have control over. This is what you make. This is what you budget.

Variable Expenses

The rest of your expenses left to will be expenses that can vary from month to month, depending on the level of usage. The fact that they're variable has nothing to do with their level of importance.

Expenses like food, utilities, clothing and car maintenance are all necessary expenses, but can vary from month to month, making them variable.

Now that you have separated out your fixed and variable expenses, you are ready to begin budgeting the amount of income you actually have control over.

Take a look at this sample budget to get an idea of how to create one for your family.

You Make Only What You Have Control Over

This is a big concept to wrap our heads around, since when we take a job, we often speak of what we make in terms of our gross salary. What's really gross is that we don't make anywhere close to this number.

We only make what we have control over. That's it.

So what do we have control over? As we talked about earlier, we don't really have control over our fixed expenses. Those things should be considered mandatory withholdings, since they are. Whether we like it or not, taxes, mortgage, insurance, savings and debt payments are going to be paid.

The stuff we do have control over are those variable expenses that we can adjust depending on how much income we have left over. That is why this number is the only one that really counts. It's the one we have control over.

When there is enough money left over to cover all of these variable expenses, life is good. We don't have to borrow money for thins like clothes or entertainment because we make enough. But what happens when we don't have enough?

If there's not enough to cover these variable expenses, you have two options. The first option is to reduce your variable expenses until there is enough money to cover them. Eating out less often, renting movies instead of going to the theater and shopping for less expensive clothing are often among the first reductions that are made.

The second option is to increase you income. You may be able to find a way to boost your earnings at your current job, through a raise or increased hours. You may need to find a second job or something to on the side to make some extra cash.

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