How to create a good budget

In order to keep track of where your money goes, you need to have a budget. A budget is simply an itemized description of income and expenses. Having a budget will enable you to determine how you spend your money, get more out of the money you have and make it easier to meet the financial goals you have set for yourself.  These are the steps involved in putting together a budget:

  1. Choose a system
  2. Determine your income
  3. Determine your expenses
  4. Compare income and expenses
  5. Determine your goals
  6. Improve your situation
  7. Monitor your progress


Choose a system: This is determining how you will track the budgetary information.  You can use a personal financial software package. If a paper and pen works for you the better.

Determine your income:  Calculate and record the income you receive from various sources. E.g. 

  • Gross salaries and wages
  • Bonuses
  • Interest and Dividend income
  • Pension
  • Social security income
  • Tax refunds
  • Rental income
  • Any other income sources

Determine your expenses:  More time will be needed here.  Find how much you spend on the expenses:

Fixed committed expenses:

  • Mortgage
  • Auto loan/lease
  • Loans
  • Taxes
  • Insurance
  • Children’s education
  • savings
  • Other expenses with fixed monthly expenses

Variable Committed Expenses

  • Utilities
  • Groceries
  • Repairs/Maintenance
  • Credit card debt
  • Phone
  • Clothing/Laundry
  • Medical Bills
  • Transportation
  • Phone
  • Professional Services
  • Other variable expenses

Discretionary Expenses

  • Dining out
  • Movies
  • Books/Magazines
  • Gifts
  • Vacation
  • Furniture
  • Recreational/ Entertainment
  • Tools
  • Sporting goods
  • Cable TVs
  • Pocket money
  • Other expenses that aren’t mandatory for survival

Track your spending say per month. Try not to change your spending practices during this time.

Compare Income and Expenses

Having completed the above procedure, you should be able to answer these questions:

  • How much money is coming in?
  • How much money is going out?
  • Where is it going?
  • What am I spending on more than I should?

If your spending exceeds your income, then your first priority is to change this.

Determine your Goals

Having established a clear snapshot of your financial health, set a target budget and work towards achieving it. This can be like saving for child’s education, or reducing the expenses by certain amount.

Improve the Situation

The main purpose of having a budget is to find ways to improve it. Here are some money-saving ideas you might can consider to improve your situation:

  • Check for items that are luxuries and see if you can forgo some of them
  • If you smoke, quitting can save you a lot of money
  • Check if you spend more on your car, and consider going for a less expensive car
  • Make sure you are not spending more in taxes than is required
  • Take less expensive vacations
  • etc

Monitor your progress

Monitor your budget on an ongoing basis to confirm that you’re still on target if not make adjustments where necessary.