Ah, the dreaded “B” word, “BUDGET”. Is it said out loud in your household? If not, it may be time to start allowing it! Properly discussing and implementing a monthly budget is a great way to track and manage your finances. In fact, once you correctly set and follow a budget, you’ll most likely feel like you received a pay raise, when in fact you are bringing home the same paycheck as your previous no-budgeting self.

Budgeting is a continual process, so don’t get discouraged if it doesn’t seem to work for you right away. It will take a few months to iron out all of the details. But when you finally get there, you’ll be one step closer to taking control of your finances!

Step 1:  Listing Income

The first step in the budgeting process is calculating your total household income for the upcoming month. If you feel comfortable with Microsoft Excel, start an “income” column in a new spreadsheet. If you’d rather go “old school” with a yellow legal pad and pencil, that will work as well. The point of this step is to determine how much total money will be coming in to your household over the next month. If you have a steady paycheck that doesn’t vary, this step should be pretty simple. If you have a job where the income varies (like a tip-based job), do your best to estimate what you’ll be bringing in for the month. If you have multiple sources of income, (day job, side job, freelancing jobs, child support, etc.) be sure to include them all. Once you determine how much money you will be working with, you can move on to the next step of the process.

Step 2:  Determine Expenses

Yuck! The income side of the budget is the fun part, but the expense side … not so much. Start an “expenses” column on your Excel worksheet or paper pad. Now, start listing your expenses for the upcoming month. Start with the regular, recurring expenses like your mortgage/rent, car payment, insurance, and so on. It may be helpful to look at your previous month’s online banking history to help jog your memory. After the regular, recurring expenses are written down, take a look at the month ahead and determine any additional expenses that don’t normally recur every month. Do you need to purchase school supplies for the upcoming school year? How about renewing your vehicle’s tags and registration? Do you need to purchase gifts for a family member’s birthday? All of these events will put additional strain on your budget. Make sure you add them to the “expenses” column of your current month’s budget so that you can plan accordingly for them. Then, spend some time adding up how much you normally spend on categories like food, clothing, and entertainment (again, your online banking history can help with this). Once you are fairly confident that you included nearly all of your expenses, its time to move on to the next step.

Step 3:  Total Columns and Compare

Next, total up your “income” column and your “expenses” column. How did you do? If your “income” column total is substantially more than your “expenses” column, you’re on the right track already. However, most of us will realize that our “expenses” column total is uncomfortably close to (or more than) or “income” column total. You may be able to operate your household on a very tight margin, but wouldn’t it be nice to have the freedom and security that comes along with having a little extra “financial padding” every month?

Step 4:  Get it Down to Zero

You may be saying, “I’m already there!” But is it due to overspending and under-saving?  A “zero based budget” is a monthly budget where every single income dollar is allocated, leaving a zero at the bottom of your spreadsheet.  Don’t worry if that sounds scary, it doesn’t have to be. Part of your monthly budget should include some sort of saving. A $1,000 “emergency fund” should be the goal to initially work toward. Add “savings” to your “expenses” column and give it a number.  Even $100 is a good start. Consider it as another regular monthly expense and assign $100 of your monthly income to “savings”. Make this a priority. It’s important.

Now, it’s time to start assigning the rest of the money from the “income” column to the remaining items in the “expenses” column. Start with the regular recurring monthly expenses. Then move on to the food, clothes, entertainment categories. If you have some leftover income at this point, add it to your “savings” expense. Again, the point is to have all income allocated to an expense category so that you have a “zero” at the bottom of your budget sheet. If you’re running low on income at this point, it’s probably a sign that you need to make some sacrifices. The non-essentials like entertainment and eating out should be the first to go. If you have cut everything possible and it still looks like you won’t be able to make it through the next month, you may need to look for additional income opportunities to help close the gap (like a side job, garage sale, Craigslist selling spree, etc.) However, if you spend enough time on your budget and are dedicated to making it work, you have a good chance of effectively cutting down on unnecessary expenses while also putting a few dollars away into savings.

Step 5:  Monthly Editing

It’s ok if you aren’t the best budgeter during the first few months, it will take some time to create a properly working budget. You may have missed some expenses, or possibly forgot to add in some income. No big deal. Just make a note of it and add it in when you sit down and create the next month’s budget. If you hit an expensive speed bump along the way, like a root canal or major car repair, don’t be afraid to dip into the emergency fund that you are adding savings to every month. After all, that’s what it’s there for. Just be sure you work on replenishing it as soon as possible, even if it means cutting more entertainment expenses out of your budget!

If you remain focused and determined, you’ll be a budget master in no-time.  Then, once you have control over this aspect of your finances, you can move on to saving for a major purchase or paying down unnecessary debt.