How to Create a Budget

On WhatMommyDoes, I’ve talked at length about where to find Excel budgeting spreadsheets and ways to cut down on expenses.

But what I haven’t ever done is back up and explain how you can create a budget in the first place.

I figure it’s about time I do that.

Once you know the overall purpose of a budget plan, you’ll be better equipped to actually create a budget in Excel or use a software like Quicken to track your spending.

Every family’s priorities, wants, and needs differ, so one single budgeting plan will not work for everyone. However, everyone can follow the same overall budgeting checklist to get started.

Learning How to Budget Money – Two Key Concepts

When I first started creating a monthly family budget, I followed a simple budgeting technique that I think can work for any family.

1. First, I determined the maximum amount we could spend each month without incurring additional debt. Once I did that, then it was easy to see how much money I had available each month.
2. Then I prioritized our expenses in order of importance. For example, health insurance was at the top of the list and going to the movies was at the bottom.

Armed with the knowledge of how much money I had available AND what my spending priorities were, I was then able to allocate the total among my expenses in order of importance.

The best part about this method is it doesn’t allow for overspending. If you know your spendable income and also know the priority of your expenses, you can easily see what needs to be cut once you run out of income to “spend.”

This budgeting method is what I call balancing income and expenses.

Simple Strategy to Create a Monthly Budget – Balance Income & Expenses

Now that you know the overall rationale and first two basic steps, here are more detailed instructions for actually completing this exercise.

For this task, I recommend, of course, my own Sample Monthly Expenses Spreadsheet.

It’s the Excel template I created to track our finances and even includes our expenses primarily in order of importance. It’s a great starting point for anyone who likes to go into detail and list each expense separately.

If this doesn’t work for you, there are tons of free budget templates available online with a quick Google search. I particularly like some of the free templates available at Vertex42 and also the Microsoft Office online.

Once armed with your chosen Excel file, follow these steps to balance monthly income and expenses.

How to Create Your Budget in Excel

1. Calculate net spendable income by taking gross income from all sources (jobs, gifts, support payments, etc) and subtracting out federal and state income taxes. This will determine the maximum amount you can spend. My monthly budget template does this for you – all you need to do is enter your amounts and tax rate.
2. List typical household expenses in order of importance. If necessary, consult a list of suggested expense categories.
3. Indicate actual or estimated actual values beside each expense category.
4. Starting at the top of the list, subtract each expense in order of importance until income has been used up (the balance is zero).

Note: For expenses that don’t occur monthly, but rather yearly (homeowner’s associate dues) or sporadically (like car repairs), you will need a way to account for them or risk blowing your budget when they do occur.

The best way to do this is look at how much they cost in the past year, then divide that total by 12 to come up with a monthly amount to set aside for them.

Put those line items in your budget just like your would any other expense, then set that cash aside in savings account until needed (do it automatically after each paycheck if you think you’ll be tempted to spend that money unless it’s out of sight).

Allow for Extra Monthly Expenses or Increased Savings

Now that you have a visual representation of what your ideal monthly cash situation looks like, the fun begins.

Since the goal of this budgeting plan is to balance household monthly income and expenses, any monthly costs that can’t be incurred without taking on additional debt shouldn’t be in the household’s basic monthly budget. Technically.

If you’re a strict budgeter and can simply cut out the things you used to spend money on without blinking an eye, simply delete those expenses from your spreadsheet and be done with it.

However, if you’re not a financial robot and like to have fun or if you just like a good challenge, this is where you might like to figure out ways to cut in one area in order to fit in more somewhere else.

For instance, you can free up funds for a monthly date night by finding ways to cut back on other expenses like cable and internet.

In order to keep your financial house on solid ground, I recommend only allowing additional expenses into the budget if you make more money and/or spend less in an expense category ranked higher up on the list.

There are infinite ways to play around with this equation. Hands down my favorite way to address unforeseen expenses is to have a way to bring in extra cash when I need it. You can only cut back so much before it drives you crazy or becomes impossible to cut further. But you can always increase your income to meet your needs!

For ideas on ways to bring in extra cash, check out these posts:

5 Survey Websites That Pay (including one that pays a $5 signup bonus)

7 Ways to Make an Extra $500 to $1000 per Month

10 Home Business Ideas for Moms

Related posts: 

5 Words That Will Save You Thousands Each Year

6 Tax Benefits of Having Kids – Credits & Deductions You Don’t Want to Miss

This post is included in the Complete Guide for Stay-at-Home-Moms, a collaborative effort by over 50 mom bloggers