Money Management 101: How to Create a Budget

Budgeting is the foundation for all financial planning.

The definition of budget varies and if you ask ten people you will get five different answers. Here is my definition. A budget is a calculated plan for meeting expense in a given time period. I like to call a budget a spending plan because you are planning to spend your money. And I believe that without a sound budget, you cannot effectively manage your money!

However, the first step in creating a budget is to keep track of your expenses. Before you sit down to actually write out a budget or spending plan, it is best that you have a good idea of how you are spending your money month to month.

Most of us just starting to budget do not do that.

Here’s what happens, you get excited by something you hear or read; or you just get tired of living paycheck to paycheck; or it’s the first of the year or new month and we decide that we want to be better stewards of our money, so we start to make a budget or spending plan. And we get a piece of paper and a pencil or use a spread sheet and we write down or type in our income and then we start subtracting expense from it. With no history of how we spent our money last month we just guess at some of the numbers.

So let’s say you decide that you will spend $300 at the grocery store. Three weeks into the month you see that you have spent $400 at the grocery store. So now what do you do? You are missing $100 from your budget. You get frustrated and quit saying, “This budgeting stuff does not work for me.” But you missed the first step in budgeting, tracking expenses. Because you did not track your expenses first, you do not know how much you will spend at the grocery store or anywhere else.

So now what?

Again, a budget is a plan for how you will spend your money, taking that a step further, it is an estimate of how you will spend your money. Without tracking your spending, your estimate of how you will spend your money, your monthly budget, is not as good as it would be if you would have kept track of how you spent your money say last month.

Once you track your expenses for a month, preferably three, you will have a much better idea of how you will spend your monthly income. You can make a better estimate, educated guess, of how you will spend your monthly income. Now you can get out your paper and pencil and plan to spend your money.

Without a sound budget you cannot manage your finances effectively. To estimate your monthly expenses, track your spending for a couple months so that you will have a better guess, estimate, of how you are spending your money. Then you can make your budget and start winning with money. Budgeting is the foundation for all financial management.

Article by Wil G.

This post was included in the Canadian Finance Carnival and Carnival of Wealth.

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