How to Create a Budget in Three Steps

Creating a budget is an extremely important part of saving money.

You know it.

I know it.

Everybody knows it.

But nobody wants to actually create a budget.

However, if you are in debt of any kind, and you don’t have a budget, then it’s time to get one.

And it’s actually quite easy to do.

Here’s how you start:

Step#1. Break Down Your Finances

Every budget is broken down into at least two sections:

  1. Income
  2. Expenses

Most people know what their monthly income is, but relatively few can tell you what they spent last month.

That’s your first chore:

Step #2. Track Your Spending (All of It)

Tracking your spending is not as hard as it sounds. Just get a receipt for your purchases and if you spend cash and don’t get a receipt, just track your ATM withdrawals. Subtract the cash receipts from the ATM withdrawals and you’ll know how much cash was unaccounted for.

To track your spending, simply write down the dollar ($) amounts of all your purchases on a spreadsheet. If your spreadsheet skills need work, just use a simple piece of paper.

Do this every month for three months to get an idea of your spending habits.

Here’s an example of a month’s budget:

Do you notice a problem with this budget?

That’s right, it’s in the negative—that means debt.

It also means that you’re spending more than you earn. In other words, your spending is higher than your income.

That’s not good (usually).

In order to pay off debt, you need to have a surplus with which you can pay down what you owe.

So what next?

Step #3. Review Your Spending Habits and Income

Create a budget like this for three months or more and you’ll have a good view of where you can cut spending (or increase income) and create monthly savings.

You may not have enough to pay down all your debt right away, but that’s a topic for another article.

Use the calculator below to help you determine your budget savings or debt: