How to create a budget in three steps

March 2, 2021

Creating a budget can be daunting, and some even describe it as feeling demoralizing. It’s not uncommon to feel “boxed in” or restricted when creating and following a budget. But it’s one of the most important things a person can do to manage spending and facilitate savings. As someone who has guided many clients on how to create a budget, I follow the below steps.

1. Analyze

Analyze at least one year of historical spending. This is critically important to capturing your likely spending needs going forward.

  • If you can, choose a fairly representative year.
  • Review check registers (or bank statements) and credit card summaries (or credit card statements).
  • To track data, you can use an application (Quicken, for example), a spreadsheet, or just pen and paper.
  • Our retirement categories spreadsheet is a good place to start if you’re unsure what categories include in a budget. You can also find budget templates for Excel and Google Sheets.

2. Anticipate

Include irregular large expenses, i.e., expenses that do not recur every year.

  • Some examples: Next car cost, home improvements, remodels, furniture, travel, etc.
  • To help avoid missing items, do your best to remember (and research, if possible) spending on irregular large items over the last 10 years. Then average this out on an annual basis.

3. Adjust

Adjust your budget for expenses that are likely change over time, such as:

  • Are you close to paying off debt, like a car payment, student loan, or a mortgage?
  • Are you due for a raise? This would be an excellent time to increase the amount being earmarked toward savings.
  • Are there areas in your budget where you can realistically “trim the fat?” For example, could you reduce the amount spent on dining out or miscellaneous purchases? Can you move some of that spending to savings?
  • Do you have a child on the verge of becoming independent? High school activity costs will drop off, allowances will drop off, grocery costs tend to decrease, and often young adults will move to their own auto insurance and cell phone plans.
  • For individuals going through the life transition of a divorce, some ways that spending can change include health insurance, mortgage or rental costs, home utilities and maintenance.

A piece of advice I always give to clients — make room in your budget for things that make you deeply happy. I am a firm believer in planning for the future, while also enjoying today. Finding that balance is an art, but it can be gratifying and empowering once you find it.

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