Set up Budget Categories, Calculate Budget Amounts
Step One: Set Up Categories
The first step is setting up income and expense categories to track. A common mistake is to try to fit your spending into somebody else's categories. While basic categories such as housing, utilities, insurance, and food apply to all of us, we each have expenses that are unique to our personal situation.
A successful budget will include categories that reflect the way YOU actually spend money. For example, if you regularly eat lunch out at work, you'll want a subcategory under "Food" for "Lunches Out." Think about your hobbies (golfing, crafts, gardening) and your habits (smoking, drinking, buying a cup of coffee every day) to identify other spending categories. The idea is to become more aware of where your money goes so you can make conscious decisions about spending.
If it helps to start with a canned budget worksheet, there are many available in books and online, but be sure to add and delete categories to customize the worksheet to your needs.
Step Two: Calculate Budget Amounts
To get started, collect as many of your pay stubs, bills, and receipts as possible. Calculate your average monthly gross pay (before taxes) by adding the gross pay on four pay stubs if you're paid weekly, or two pay stubs if you're paid twice a month. If your pay varies substantially from pay period to pay period, try to come up with as accurate a monthly average as possible. Now do the same for any interest income, dividends, bonuses, or other miscellaneous income.
Next, start going through your bills for at least the last three months and listing monthly expenses on a budget worksheet (see "Basic Budget Worksheet"). Make your categories detailed enough to provide you with useful information about your spending habits, but not so detailed that you become bogged down in trivial details. Remember, this has to be something you'll stick with for the long term, so you don't want it to be too much of a chore.
To come up with your monthly budgeted amounts for each category, it's important to walk a fine line between realistically reflecting your actual expenses and setting targeted spending levels that will enable you to save money. Even seemingly fixed costs such as housing or utilities can often be reduced. Start out by reviewing your bills from the last several months, and entering monthly budgeted amounts for each category. Later, when you have a better grasp on your spending, you'll look for ways to reduce many of these expenses.
See Page Two: "Record Expenses, Set Goals, and Make Adjustments."