Starting and Sticking to a Budget: Step 2

This is Step 2 in a series of 5 articles about starting and sticking to a budget. To start with step 1, click here.

2. Draft your budget.
If your roof were leaking, you'd follow the trail of water back to the source. That spending log serves the same purpose for your "leaky" bank account. Where is your money going?

Take that spending log (from Step 1 above) and create a budget. (Our Spending & Saving Tracker and printable Budget Worksheet make it easy.) Write down your expenses and income.

Start by listing your monthly take-home income, and then list every bill you pay each month. Refer to your spending log for help. For variable expenses, such as groceries, utilities and water, use the average from the past year. If you don't know how much you spent groceries, use the amount on your spending log as a guide.

Include expenses that happen once a year (such as car registration, holiday gifts, or your family vacation) or just a few times a year (insurance). Divide those yearly or semiannual expenses into monthly amounts. ($500 a year for Christmas gifts=$41.67 a month.) That $41.67 a month is a lot easier to spend or save than $500 all at once.

Lastly, subtract all your expenses from your income. Is the number positive or negative? Are you saving or spending?

Extra credit: Don't include income that's not guaranteed, such as holiday bonuses or income tax returns. Many families build debt each year in anticipation of an income tax refund that will cover those bills. Live on the money you already have and those refunds will be a windfall that can be applied to savings or used for a vacation.

Keep reading! Starting and Sticking to a Budget – Step 3
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Member Comments

Thanks! Report
Thanks for a great article! :) Report
Budgeting is hard when you first start but as time pass it gets easier Report
There's all kinds of good software, both free and inexpensive, that can help you with this. I chose one that lets me look at my retirement portfolio as well as my bank balances and credit cards, automatically downloading and categorizing that information for me whenever I do my bills. The process is a lot like food tracking: realizing where your money goes can be a big eye-opener, and while it seems hard at first, eventually this becomes a great tool for getting your finances on a healthy path. The approach is important even if you do not have money worries!

Great help. Money worries can add to so much that leads to weight problems. Report