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How To Create A Budget That Works

by Rob and Edy

For many of us, the word ‘budget’ is synonymous with ‘boring’.

In the USA and the UK, it is estimated that only half of all working people bother to budget.

And that’s quite a lot of people.

And if you’re currently in the half that doesn’t do any form of budgeting, you’re making your life more difficult that in needs to be.

Because if you have any kind of financial goals or aspirations, you’re far more like to reach them faster and more effectively if you have created a budget plan.

It doesn’t matter whether you are living from hand to mouth or whether you are making money hand over fist – if you don’t currently budget, you could almost certainly benefit from doing so.

But before we go any further, let’s tackle the word ‘budget’.

Personally, I have never liked using the word. The truth be told, it actually makes me cringe.

Budget. Budget. Bud- . . . Ugh.

I don’t know if you find the same, but for me, it evokes images of restrictions, being frugal and tight with your money.

And nobody likes that.

But while it is true that you may need to implement some restrictions to reach your targets, budgeting is not just about that.

So the first thing I want to do is stop using the word in order to get over the menrtal barriers I think it creates.

Let’s replace the word b*dget with what it really is.

It’s simply a plan. A financial plan!

A plan to get you from where you are now to where you want to be financially speaking, in whatever timeframe you have set for yourself.

Doesn’t that sound better?

Yep – sounds like a plan, in fact!

Ok, we’re over that part, so where and how to start?

Well, there are a few steps to creating a successful budget (damn, can’t break the habit!) financial plan that I can share with you here.

Firstly, you need to think of yourself or your household as a business.

I know that might sound a bit excessive, but it really isn’t when you think about it.

Like any business, you have income and expenditure. And for a business to succeed, the income needs to be greater than the expenditure and it needs to be allocated to the right resources.

A business without a handle on its finances is going to run into problems sooner rather than later and the same can be said for individuals. All in all, not tracking your money properly is a dangerous game to play.

Makes sense, right?

So thinking of it in those terms, the first step is to assess where you are right now. And if you are married or have a partner, you should absolutely do this together.

Related ~ Money Habits of Happy Couples

Step One – Audit

Look at your bank accounts, the cash you have in a jar (or under the mattress) and any and all sources of income.

Then look at how you spend your money each month.

How much goes on a credit card?

How much on utilities?

How much on food, entertainment, discretionary spending, etc., etc.

Budget Tracker 6

What you are doing here is building a picture of your income versus your expenditure. An audit, if you like.

How you record this information is down to you and your personal preference. Your budget plan can be done on an Excel spreadsheet (I’ve made one for you that you can download below), in a notebook, using an app or even using specific financial software.

At this point, it really doesn’t matter, but the important thing is that you do actually record it.

This might be uncomfortable at first, especially if you know your finances are not in the greatest shape. But it gets easier, I promise.

How to create a budget - audit

Step Two – Review

Once you have established how much is coming in and what is going out, take the time to review exactly where the money is going.

Are you spending more than you earn?

Are there any places where you could rein in spending a little?

For a lot of people, this can be quite eye-opening or it may confirm what you know already, but did not really want to confront.

Essentially though, it will give you the opportunity to identify potential problem areas before looking at the next step.

Step Three – Identify Goals

The next step is to identify your financial goals (wants and needs). Do you need to build an emergency fund? (If you don’t have one, then the answer is an emphatic ‘yes’)

Are you thinking more about retirement planning?

Or maybe are you saving for a new car?

Related ~ Quick And Smart Ways To Build An Emergency Fund

Step Four – Allocation

Next you should allocate your income to the things you need: rent/mortgage payments, food, bills, debt payments, clothing, etc. This only works if you are strict and honest with yourself here, so for example, don’t count your daily cappuccino from the coffee shop as a need.

Go through them in order of importance and also allocate an amount to saving for your goal(s). How much you allocate to this is the subject of another post, but 10% of your disposable monthly income could be a reasonable start.

The key initially is to set yourself up with a structure. You can adjust later as you go along.

At this point, you have basically created your financial plan.

Congratulations!

That wasn’t so hard now, was it?  🙂

How to create a budget - adjustment

Step Five – Adjustments

Ok.

So now it’s time to play around with the numbers and make changes.

The chances are that you will have over-estimated expenditure in some areas and under-estimated in others, but look at this as an organic, working document, rather than something set in stone.

It can be adjusted each month until you get to a position where your estimates almost match the actual expenditure each month.

The other thing is that you can now review those areas where you maybe spending too much:

  • Can you spend less on coffee?
  • Are you actually using that gym membership?
  • Can you cancel your Spotify account?

Where the changes come from is down to you, but as mentioned above, you need to be honest with yourself and probably a little bit disciplined if you want to reach your goals.

It doesn’t matter how much you earn if you spend it all every month, so stick to your plan!

Step Six – Execution

The final step is the most simple in theory, but the most difficult in practice and that step is: sticking to it.

Having a plan is great, but a plan without action is pointless. You may find that some discipline required and you are going to have to say “No” to some things sometimes.

However, you can still allocate some of your monthly income to ‘fun money’ and entertainment.  And there are certainly cheap ways to have fun.

The key is to make sure it is a sensible portion your income and that you stick to the limit you set.

You don’t have to look at and review your plan every day, but once a month is advised to help you stay on track.

Like a lot of things, the success of this kind of financial planning comes down to habit. Once you get into the habit, it becomes second nature and you’ll be in control of your money before you know it.

You’ll probably find it is not so difficult after all and you may even not mind referring to it as a b*dget. (I still don’t.)

So, don’t make excuses, like the time is not right, or you’ll do it next month or I don’t have a spreadsheet. I’ve included links to download the All Sussed Monthly Financial Planning Tracker spreadsheet, so get on it and get budgeting planning! 🙂

While you’re here, why not take our Basic Financial Literacy Quiz and find out how financially savvy you are?

Budget Tracker 4
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