- 1). Calculate your total income. Even if you want to spend less than you make, it's critical to know what that is. You'll then structure your budget not to exceed your cash inflows or spending target.
- 2). Compile your monthly overhead costs. Look at your average monthly costs for utilities such as electricity, telephone, power and gas. Rent or mortgage costs are imperative too. Look at any other bills such as credit cards, car payments, insurance and consumer loans. If you don't have hard copies of previous bills handy, contact each vendor and ask for an average or view archived bills through online access to your accounts. Also examine other essentials like food and gasoline that don't result in bills.
- 3). Create a spreadsheet of your expenses -- either on paper or electronically. Label each expense clearly. On expenses that vary each month such as electric bills, estimate to the high side to make sure your budget always works.
- 4). List expected, but not regular future costs for which you need to save. Auto repair, veterinary visits, vacations, birthday parties, weddings, retirement and college are a few common expenses that people prepare for by setting aside money each month.
- 5). Subtract your overhead costs from your spending target or income. This is your discretionary income.
- 6). Create categories of discretionary spending based on how your live your life. Be as thorough as possible. Discretionary spending likely includes gifts, eating out, movies, concerts, gym dues, team sports expenses and club memberships. Many people also like to allocate pocket money or miscellaneous expenses.
- 7). Total your expenses to make sure they fall below your spending target. If they do, you have a functioning budget. If not, you'll need to make changes.
- 8). Adjust and reconcile your discretionary spending items to balance your budget. This usually involves difficult choices. For example, do you reduce your pocket money or save less each month for vacation? Will you cut back on going out or drop your annual membership to your favorite museum? You may be able to shave a little off several categories to make your budget work. Unfortunately, budgeting often involves cut backs and restrictions in the areas of life that are the most fun, but least necessary.
- 9). Create variations of your budget for different months or times of year if you have significant seasonal expenses. Residents of states with heavy, snowy winters need to account for higher heating costs, while those who live in states with hot summers must consider increased electricity bills for air conditioning. Summer camp for the kids, holiday meals and your famous annual New Year's party are all things to consider when devising each month's budget.
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