Get Out of Debt in 9 Steps # 2(b) – How to Make a Budget

In the previous step, I covered why you should make a budget and now it is important to talk about how to make a budget. As with any new thing you endeavor to do, the best advice is to start now and start with something, don’t worry about making it perfect on your first try.

No matter how you start, just get started- start on paper or start with a spreadsheet, whatever works for you. Start by writing your expected net income for the month at the top. Don’t just take your average salary for the year and use that. Look at how many paydays you will actually have this month and how much money you expect to earn. Admittedly, this is more difficult if you have a variable income, or if you expect large commissions or bonuses from time to time. There is a slightly different approach to budgeting for variable incomes that I will look at later.

Assuming you have a mostly fixed income, follow this basic format:

Income
Cash on hand: $500
Net Income: $2,000
Total: $2,500

Expenses
Mortgage: $1000
Utilities: $200
Groceries: $300
And on and on…
Difference– calculated field subtracting your expenses from your income.

Download this sample spreadsheet if you want an easy way to get started (Excel file, opens in a new window). The categories included are mostly what I use now, but you will of course change them as appropriate for your needs. Remember, this is supposed to be a simple starting point. I have come up with something a lot more complicated that I use now, but it didn’t start that way and I only made changes as I saw needs develop.

If you have a variable income, the same concept applies, but you need to go about it in a slightly different manner. Start by making a list of your expenses for the month and rank them in order of most important to least important. Then list your income, base income and cash on hand (whatever you know you will have) and start applying that to your expenses. Keep working your way down the list until you run out of money. I’m not an expert at managing a variable income. I have worked as a freelancer in the past and relied on a variable income, but I didn’t budget or spend my money wisely at the time. 🙂

The first time I created my budget I realized I was deeply in the red! It was over $1,000 negative. Of course, the only way to spend more than you earn is to use credit cards or savings, which is why stopping the credit card spending is critical to getting started on getting out of debt.

Ideally, your difference in income and expenses will be $0.00 or slightly positive. The idea is not to spend every dollar you have, but to allocate ‘extra’ dollars either to savings or debt payments. For example, if you work hard at cutting your grocery spending for the month, change your allocation and send that extra money to debt or savings.

Making your first budget is a huge step toward taking control of your finances. However, it is highly unlikely that your first month of living on a budget will go as you planned. Don’t let that discourage you! Just track your progress, update your budget weekly, and make changes as needed. You will get better at this each month, but it takes time to get it right.

In the next step I will look at how to raise some extra cash to give you a nice head start on getting out of debt.

9 Steps to Get Out of Debt

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