The steps involved in how to prepare a budget can seem quite straight-forward to some people, however, it may not to others. Understanding basic, such as how to prepare a budget is a critical skill in personal finance. And now due to the current economic and social changes, understanding the basics of how to prepare a budget is skill we all need.
Your Income May Be Affected
Before we dive into the steps on how to prepare a budget, I do recognize that your personal spending and income is likely going to change. No matter what your income and expenses, understanding the basic concepts will help you.
Whenever, I work with clients, we review at a minimum, three months of income and expenses. Since you may have extra time on your hands, I suggest reviewing six months of data.
Don’t get too hung up on how things have changed. Unless, you move, sell your car, stop using your cellphone – many expenses will be the same.
You may uncover areas where you never realized you are overspending
Ask yourself these questions. What can you do NOW to reduce some of these obligations? Have you reviewed your automobile insurance recently? Are some of your small expenses been adding up? Is your the right size for you and your family? Do you need to have a new car every three years? Are their monthly subscriptions that you no longer use?
Basic How to Prepare a Budget (Spending) Plan
Step 1: Identify Income
Estimate your monthly income by checking your pay stub. Use the net amount or take-home pay. If you are paid as a consultant without taxes deducted, include an amount for taxes as an expense.
Sources
List all of your income sources:
After-tax wages from a job
2nd job after-tax wages
Withdrawals from savings
Other (i.e. gifts)
Total all of your income sources $_________
Step 2: List Expenses
Estimate your monthly expenses. If you are not sure how much you spend every month, start a spending notebook, use an app, sign-up for online tracking like mint.com. Track what you spend on everything for the next three months – include all small purchases. This means every dollar that you spend. At the end of the time, add up what you spent, divide by the number of months, and use the result to complete the worksheet.
Step 2a: Monthly Fixed Expenses
List all of your fixed expenses:
Saving (think of saving as a regular expense and it will become a habit)
Housing: Rent or mortgage
Utilities (heat, water, electricity)
Cell phone
Cable/Internet
Auto loan or lease
Monthly parking fee
Commuting expense
Insurance (auto, health, renters, homeowners, life)
Credit card
Student loan payments
Total Monthly Fixed Expenses $_________
Step 2b: Monthly Variable Expenses
List all of your variable expenses:
Groceries
Food (eating out)
Household expenses (repairs, supplies, maintenance)
Transportation (gas, auto repairs, tolls, parking)
Donations/Gifts
Medical (out of pocket)
Clothing
Entertainment (movies, dates, concerts)
Personal care (haircut, makeup, toiletries)
Other
Total Variable Expenses $_________
Step 2c: Periodic Expenses
List all of your periodic expenses:
Expenses that are paid infrequently, most likely quarterly, semi-annually, or annually. Estimated tax payments, membership dues, insurance premiums, gifts, vacations are a few examples. Add up the entire year of these expenses and divide by 12 for the monthly amount.
Periodic payment: ________________ $ _________/year divide by 12 $_________
Periodic payment: ________________ $ _________/year divide by 12 $_________
Periodic payment: ________________ $ _________/year divide by 12 $_________
Total Periodic Expenses $_________
Step 3: Calculate Income less Expenses
Total monthly income
Total all monthly expenses (fixed, variable, periodic)
From monthly income subtract monthly expenses
Step 4: Make Adjustments
If the amount in Step 3 is a positive number, then you can save more money for future goals.
If the amount in Step 3 is a negative number, then review your spending plan decide where you can cut expenses and or increase your income.
Download this 2-page Worksheet.
In Summary
One thing to remember, preparing a budget is not a one-time event. As your circumstances change, you will need to make changes to your budget. This is why understanding the basics on how to prepare a budget is an critical money management skill.
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