How to Budget Your Finances in 5 Easy Steps

One of the key elements of good money management is getting control, and one of the ways of getting control is to make a budget and stick to it.

If you don’t know how to budget your finances, or need some guidance then read on.

A budget is generally a planned list of all sources of income and all statements of expenses.

In its simplest form, a budget is no more than subtracting what you spend from what you earn.

By creating a budget and learning how to budget your finances, you will start to take a serious and truthful look at your past decision making, your families current spending habits, and how you can go forward in the future

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Budget Your Finances in 5 Easy Steps

If you take the time to sit down and budget your finances you will be amazed by the difference it can make

It’s not uncommon for families to go through this process and realize they can save $5000 to $10,000 a year, just by managing their money better.

And more often than not the whole process can be done in a day and managed monthly in an hour.

What you have to be though is truthful to yourself, and be prepared to start making some tough decisions in order to get control and if necessary change your spending habits

Here is a step by step guide to help you budget your finances

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Step 1: Write Down What Comes In

When you start tracking how much you earn with respect to your budget, look at what you bring into your household after tax.

That will keep things simple.

Include all sources of income that contribute to the household budget – both partner’s incomes, any second earnings, lodgers, benefits, or any other payments

Try and use a monthly cycle if you can.

At the end of this step, you should have a pretty good idea of what comes into the household on a month by month basis

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Step 2: Write Down The Essential Expenses That Go Out

Start off with the stuff which you are obligated to pay month on month and write them down.

For the moment write down what you pay now (we’ll look at how to reduce them separately)

There are 2 basic types of essential expenses.

Fixed Expenses and Variable Expenses.

• Fixed expenses are the regular monthly (quarterly/annually) expenses that you pay and the payment remains the same.
• Variable expenses are the regular payments that due each month (quarterly/ annually) but the amount due varies. The electric and gas bills may fall under this category (and it is often helpful to take out a payment scheme that spreads the cost into equal chunks over the year)

Write all these down in a second column and add them up

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Step 3: Account For Non – Essentials and Hidden Expenses

After you have taken care of all of the previously mentioned expenses, what is left is referred to as your discretionary income.

This is stuff that is not essential but you need to control

Discretionary income is often the most difficult to identify

The best way of doing this is to write down everything you and your family spend over a period of at least a month

You can then go through and work out what is important and what can be reduced or got rid off

It’s also important to pay close attention to the hidden expenses within your spending.

These little purchases are usually the difference between a person having some money in the bank and being in debt.

Be very disciplined amount writing everything down – you will be amazed at how the little things add up

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Step 4 – Create an Initial Budget

Now that you have completed listing all sources of income and expenses over at least the first month, you will have a much better idea of what your financial situation looks like.

The next step is going to be putting all these numbers into a budget based on your current situation.

Basically, add up your incomings, add up all your outgoings and the difference is what you have to deal with…

The idea of budgeting is to set a fixed amount each month for each line in the budget and to then track against that line

So if you can afford $500 for your monthly grocery shopping, that is what your budget should be and your task will be to stick to $500 every month

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Step 5 – Keep Tracking Month On Month

So now you have created an initial budget all you need to do month on month(!) is to keep track of your spending against the relevant line in the budget and adjust as appropriate.

Of course, where you are overspending you will need to make adjustments and once you have got control there are three ways you can make an adjustment:

• Earn more
• Spend less
• Do both!

There are lots of articles on this site to help you budget your finances and do all of the above

This article – “how to budget your finances” was first published on 13/11/2013 and revised and updated 16/01/21: