How to create a budget

How to create a budget

A budget is a written record of money coming in and money going out over a set period, usually a month. A record is required to manage money effectively. It shows where the money went, and the difference between the two sides is the remainder.

The first part of the record is income. Paychecks, benefits, and any other regular money in are listed with their amounts and how often they arrive. Income that varies from month to month is listed at its usual amount, and months that come in higher or lower show up in the comparison at the end of the month.

The second part is money going out, in two groups. Fixed outgoings are amounts that stay the same each month, such as rent, loan payments, and insurance premiums. Variable outgoings change month to month, such as groceries, fuel, and household goods. Keeping the two groups separate is what makes the record useful, because the fixed group is set and the variable group is where month to month movement happens.

The remainder is income minus payments. A positive remainder means money was left over. A negative remainder means payments were higher than income, and the difference came from savings or from borrowing.

One commonly cited way of dividing take home pay is:

50% to needs

30% to wants

20% to savings and extra debt payments.

That split is a description of one popular structure, not a rule. Other splits exist, and the split that fits a household depends on its fixed costs.

A sample month makes the arithmetic concrete. Sample take home pay is 3,200 dollars. Sample fixed payments are 1,900 dollars. Sample variable payments are 700 dollars. The remainder is

Sample

$3,200-$1,900-$700= $600.

Applied to the same sample, the fifty thirty twenty split would be 1,600 dollars, 960 dollars, and 640 dollars.

The record is compared against what actually happened at the end of the month. Bank and card statements show the real amounts, and the comparison shows which categories were higher or lower than the record. Categories that run over in one month are adjusted in the next month's record, and the record gets closer to reality over several months.

General education only. This article describes how a budget is structured. It is not financial advice, and it does not consider any reader's situation.