7 Steps to Creating a Monthly Budget

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Reasons abound for needing a budget. Perhaps you shell out lots of money on account overdraft fees; maybe you have debt that cries for repayment; or maybe you're just stressed about making ends meet every month. Regardless, it's time to act. Follow these seven steps toward creating a monthly budget that suits your personal situation and gets your finances under control.

Set a goal.

Before even attempting to draft a budget, have a goal in mind. You may want to deposit at least $100 each month in a savings account, pay $100 toward credit card debt, close out each period with an "extra" $50 for pocket money -- whatever. Start small so you don't doom yourself by concluding the goal is impossible to reach before even trying.

Know what's going out and coming in.

You can do this the old-fashioned way with paper and pencil or you can join the digital era by acquiring software, such as Quicken, to calculate the numbers. First, add up the fixed quantities: every dollar that comes in each month (if you work an hourly job or one with variable hours, err on the side of caution by using your lowest take-home pay) and every dollar that goes out on a regular schedule (loan payments, utilities, car, mortgage/rent, gas, groceries, etc.). Then, subtract the expenses total from the income total. This step toward creating a budget provides valuable information about where things may be going awry. If the remainder is less than zero, there's no time to lose.

Keep a running tally.

The variable numbers in your monthly outflow are a little harder to compute in one sitting. For a true sense of the total amount flying out of your pocket each month, start keeping receipts or using a small notebook or app on your smartphone that tracks your daily, weekly, and monthly "extra" spending. Most banks offer online applications that also help you track how much you spend on recurring expenses, such as gas and groceries. Other app options include Level Money, Spendee, and Expensify. Note that these apps are useful only if you consistently enter the data. If you can't do this on the spot, make a habit of entering receipts at the end of every day.

Know the difference between a luxury and a necessity.

As you examine what comes in and what goes out, pay close attention to expenses that are necessities (e.g., housing, food, medications) and those that are luxuries (e.g., dining out, entertainment, beauty). This can be tricky because goods and services that some of us regard as luxuries are necessities for others. For example, a massage once a week may be a treat that helps you relax, but your friend may need one for medical purposes. Remember, the monthly budget you create should make sense for your unique situation.

Find ways to cut back.

Once you can see the flow of money through your account, you'll surely notice extraneous spending -- too much fast food, too many pay-per-view movies, the thermostat set too high. Identifying the drains on your resources lets you begin to patch the holes. Limit yourself to one fast food lunch a week, one pay-per-view movie a month, or room temperature that's a degree or two lower. Cutting back even a few dollars on a daily basis can have a huge impact on your monthly budget. Chowing down a fast food meal twice a week for a month, at $7 a pop, totals $56; you can buy a lot of groceries for $56.

Allow yourself a splurge.

Don't give up all the fun in your life; doing so makes sticking to your budget goals all that much harder. Allow yourself one splurge a month, maybe dinner at a casual restaurant, or a monthly massage, or a movie and popcorn. Consider this a gift to yourself for being true to your new thrifty ways. Just keep the indulgence reasonable -- under $50, say. After a while you may not feel the need to splurge.

Stick to it.

In order for all this hard work to pay off, you can't cheat. There will be months with unforeseen expenses, like a flat tire or an exceptional cold spell, but if you've stayed on budget you should have the resources to cover the surprises without inflicting lasting damage. If you are honest with yourself about what comes in and what goes out, you can find a way to stay afloat with grace.