Find Out What You Have

You must know how much income you have coming in and what your expenses are, before you can decide how much goes where.

Your Income

Your expenses account for only part of the picture. You also need to add up your monthly income.

On a blank sheet of paper, list the jobs for which you receive a salary or wages. Then, list all self-employment for which you receive income, including farm income and sales commissions. Finally, list other sources of income, such as the following:

• bonus pay
• dividends and interest
• alimony or child support
• pension or retirement income
• public assistance

Next to each source of income, list the net (after deductions) amount you receive each pay period. If you don't receive the same amount each period, average the last 12.

Next to each net amount, enter the period covered by the payment -- such as weekly, twice monthly (24 times a year), every other week (26 times a year), monthly, quarterly or annually.

Finally, multiply or divide the pay period into the net amount to determine the monthly amount. For example, if you are paid twice a month, multiply the net amount by two. If you are paid every other week, multiply the amount by 26 (for the annual amount) and divide by 12. (The shortcut is to multiply by 2.167.)

When you are done, total up all the amounts. This is your total average monthly income.

Your Expenses

Write down all of your expenses. You may want to try a computer program, such as Intuit's Quicken or Microsoft Money, to keep track.

To best understand what's happening, use good old fashioned pencil and paper.  Here's how:

• Take out eight sheets of paper, one sheet per week. You will record your expenses for two months. By doing this, you'll avoid creating a budget based on a week or a month of unusually high or low expenses.
• Select a Sunday to begin recording your expenses and record that Sunday's date at the top of one sheet of paper.
• Carry that sheet with you at all times. (or do it the easy way with BudgetMap!)
• Record every expense you pay for by cash or cash equivalent -- check, ATM or debit card or automatic bank withdrawal. Don't record credit card charges on this sheet. When you make a payment on a credit card bill,  list the items paid for.
• At the end of the week, put away the sheet and take out another. Go back to Step 3.
• At the end of the eight weeks, list expenses you have but did not pay during your two-month recording period, such as property taxes, car registration, magazine subscriptions, tax preparation fees, insurance payments, and seasonal expenses such as summer camp fees or holiday gifts.

Create Your Budget

After you've kept track of your expenses and income for a couple of months, you're ready to create a budget. Follow these steps:

• On a blank piece of paper, write down categories into which your expenses fall. Also total up your two months' and estimated seasonal expenses for the categories you create.
• Starting on a second piece of paper, list your categories of expenses down the left side of the page. Use as many sheets as you need to list all categories. These are your budget sheets.
• On the sheets containing your list of categories, make 13 columns. Label the first one "projected" and the remaining 12 with the months of the year. Unless today is the first of the month, start with next month.
• Using your total actual expenses for the two months you tracked and your estimated seasonal expenses, project your monthly expenses for the categories you've listed. To find your projected monthly expenses, divide your actual two months' expenses by two, divide your total seasonal or annual expenses by 12, divide your semi-annual expenses by six and divide your quarterly expenses by four. 
• Enter your projected monthly expenses into the "projected" column of your budget sheets.
• Add up all projected monthly expenses and enter the total into a "Total Expenses" category at the bottom of the projected column.
• Enter your projected monthly income below your total projected expenses.
• Figure out the difference.

If your expenses exceed your income, you will have to cut expenses or increase your income. One way to do this is to make more money -- but let's assume that you are not likely to get a substantial raise, find a new (higher-paying) job, take on a second job or make significant money by selling assets. This means you must decrease your expenses without depriving yourself of items or services you truly need. Review your expenses with any eye toward reducing. Rather than looking to cut out categories completely, look for categories you can comfortably reduce slightly. For example, let's say you need to cut $175 from your budget. You had also planned on spending $75 a month to eat out dinner, but are willing to decrease that to $25, thereby saving $50. Keep looking for categories in which you can make similar, small adjustments.

Back to: Budgeting