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Your eyes may glaze over at the mere thought of creating a budget, much less following one. It may help if you keep in mind that the purpose of a budget is so you will have the best chance of having the money you need for medical care as well as to meet any other goals you may have. A budget will also help you feel more in control -- and make it easier for someone else to manage your day-to-day finances if necessary. 

Doing a budget is a small price to pay for the rewards you want down the road.

A budget doesn't have to be sophisticated or complex. It can be very simple. You can make your own on a yellow pad or in a notebook, buy a budget from a stationary store or use our worksheet. If it's easier, print the worksheet. If not, save it on our secure site.

If there are other members of your economic unit, you'll need to get them interested and involved in the budgeting process. For it to work, everyone will have to work on sticking to your new budget. If you have children, involving them will also teach them to spend money wisely. It seems that everyone has ideas on how other family members can cut back on spending.

We're not trying to say that doing a budget will be fun. In fact, the process could even bring up strong emotions. If it does, try to work them through. (For help dealing with emotions, click here.) Try to think of this process as medicine: it may not taste good going down but the odds are you'll be glad you did it.

NOTE: For information about dealing with a financial crunch, click here

A budget involves eight steps, each of which are described in the other sections of this article

Step 1. Find out what your spending patterns are.  
Step 2. Break down your expenses by core expenses, discretionary expenses and unnecessary expenses. 
Step 3. Consider whether there are ways to spend less on the things you need
Step 4. Think about your goals for your money. 
Step 5. Set flexible rules for a budget that fits your circumstances
Step 6. Create the budget.
Step 7. Give the budget a trial period by using apps or an envelope to help keep track 
Step 8. Tweak the budget as time goes along.

To Learn More

Step 1. Find Out What Your Spending Patterns Are

Before you can estimate where your cash should go in the future, you'll need to do some research into where your money has been going and put some thought into where you'd like it to go.

  • Start by completing a Cash Flow statement. This will show you where your money went over the past year. This process doesn't have to take a lot of time. We're more concerned with rounded off numbers in a quantity that suits your economic situation. For instance if your income is $45,000 a year, you may be interested in $100 increments. A person with more income may round numbers off at the $500 or $1,000 level. The odds are you will be surprised at the results.
  • For at least two weeks,and preferably longer, start keeping a spending diary for all the cash you spend -- and receipts for anything you purchase by check or credit card. By adding up all your notes and receipts by category of spending (food, clothes, entertainment, etc.), you'll see where your money is going. This knowledge will both help you identify ways to cut back and help make your budget realistic.

For your spending diary, use something that's easy to access every day at spare moments. The "notes" section of your smart phone, day-planners, electronic organizers, or a simple memo pad can all work -- as long as you can usually keep what you use with you. To keep track of money from an ATM machine, write the expenses on the withdrawal receipt, then insert the receipt into your spending diary.

Step 2. Break Your Expenses Down By Core Expenses (Expenses You Can't Do Without), Discretionary Expenses And Unnecessary Expenses:

  • Core expenses: Core expenses are essential items such as food, shelter, transportation, and medical care. While you don't want to do without any of them, consider if they could be reduced. See Spending Less.
  • Discretionary expenses: Discretionary expenses are the things you pay for which are not key to your survival but necessary for your lifestyle -- for instance, gifts and entertainment. Sometimes things that are discretionary can become essential. For example, if you are stressed out and seeing a movie is one of the best ways you can relax, then the expense of a movie that relieves your stress might be considered "core" because reducing stress can help improve health.
  • Unnecessary expenses: These are expenses that you never need to incur.

If it becomes difficult to identify discretionary or unnecessary expenses, pretend you are a friend looking at your list or, even better, have a friend or family member look at your list and give you their opinion.

Step 3. Consider Whether There Are Ways To Spend Less For The Things You Need

For example:

  • Perhaps you can rent a movie instead of spending much more seeing it in a theater.
  • Perhaps you can bundle your telephone, television and cable service which generally costs much less than purchasing the three services separately.

For ideas, see our article on Spending Less Day to Day  also see: Spending Less, An Overview

Step 4. Think About Your Goals For Your Money

Think about what your goals are. Are you looking to fund your Emergency+Fund? To save for a trip? To put more money aside for retirement?

While thinking about goals, consider reading our article about Increasing Your Income to find out if there are easy steps you can take to increase your income.

Step 5. Set Flexible Rules For A Budget That Fits Your Circumstances

Useful numbers: Use numbers that make sense for your life. For example $10, $100,$1,000 or larger units

Make your budget flexible: Include some extra money in your budget that's not earmarked for anything in particular. This will allow for unexpected expenses and give you some "play" money. Also consider putting in bonus money to spend any way you like -- absolutely guilt free -- during each period in which you meet your budget. It doesn't have to be a lot of money -- just about any amount will do.

Give yourself an allowance: Unless it suits you, trying to keep track of every dollar you spend can be stressful. Consider giving yourself a weekly cash allowance of "pocket-money" to use towards things like bus fare, taxis, lunches, and the like. Calculate the amount of the allowance by putting these items in your budget, then add them up. This way, if, for example, you want to take a taxi one day, you'll be able to without worrying about your budget. However -- depending on how much of your "allowance" is left -- you may then need to bring lunch to work or cut down on something else the next day.

Match timeframes: While people often get paid weekly or bi-weekly, fixed expenses and debt payments are usually on a monthly basis. But, a month is actually more than four weeks. If your expense is monthly and your income is weekly, either divide the expense by 4.33 -- for a monthly budget -- or multiply your income by 4.33 for a weekly budget. For example:

  • If you're doing a weekly budget and your rent is $800 per month, you should budget $185 ($800 divided by 4.33) per week, not $200 ($800 divided by 4).
  • If you get paid every two weeks, do the same thing but use the number 2.17.

Divide expenses between Core, Discretionary and Unnecessary Expenses: (See above.) Only include Core and Discretionary Expenses in your budget.

Put savings first: Regardless of your current financial or health situation, put in a number -- even if it's only a dollar -- for savings, especially if you don't have a fully funded Emergency+Fund. The easiest way to save is to have money automatically deducted from your paycheck. Saving may make your financial life tighter than you would like, but you'll have some money put aside for life's funny tricks "just in case."

Create a weekly or monthly budget of what you can spend.

  • One of the good things about a weekly budget is that no matter what happens, you can start fresh again the next week.
  • On the other hand, a monthly budget is easier for people who receive income and pay bills on a monthly basis.
  • Our chart works whether you are preparing a monthly or a weekly budget.

Include occasional expenses: Try to budget an amount for each item whose cost you can reasonably anticipate. Some expenses are easy to forget about because they may occur less frequently than monthly. For example, if you pay your gym membership once a year, you'll still need to budget for it. Divide the annual amount by twelve and budget that amount per month. Think about things like insurance that are paid quarterly, or veterinary expenses that may only come up twice a year.

Don't include income until you receive it: You might be tempted to include income such as overtime, bonuses, back disability payments, health insurance reimbursements, or other money you are expecting. Don't. If the funds don't come in on time -- or at all -- your budget can get out of whack. Include only your regular weekly or monthly sources of income, such as the income from employment, an approved disability claim that has already started paying you, or rent your receive from a tenant who is bound by a lease.

If you can swing it, consider budgeting as if there are only four weeks in a month. If you get paid weekly, you'll have an "extra" paycheck four times a year that can be used however you need or want to. (If you get paid every two weeks, you'll have two extra checks.)

Round up: Don't try to budget everything to the penny. You may not even want to do it to the dollar, preferring to round things off to the nearest five or ten dollars. If this works for you, fine, just be sure to round UP not down. So if your budget calls for $23.18 per week for the electric bill, budget $24, $25, or $30 -- NOT $20!

Group expenses together: Just as governments do when they study the spending patterns of its citizens, group your expenses together. This will give you a built-in flexibility. For example, instead of budgeting for buses, taxis, trains, and gasoline separately, use one amount for a transportation total. You'll then be able to choose different ways to get around without having to keep track of your budget for each specific type of transportation.

Step 6. Create The Budget

You'll see that our chart -- Budget -- incorporates the above ideas.  If you want a more sophisticated budget tool that can link to your financial accounts and other tools to help keep track of your net worth, see sites such as offsite link

If after completing your budget your spending exceeds your income, review your expenses to see what you can do without - at least for the time being. As an alternative, try cutting back on all your expenses by, say, 10%. It may show you where you can get by with less.

If you can't get the numbers to work, speak with a friend who is good at finance, or hire a financial advisor. To learn more, see Financial Planner.

Click here to see our Budget.

Step 7. Give The Budget A Trial Period By Using Apps Or An Envelope To Help Keep Track

Try to stick to your budget for a trial period -- say a few weeks to a few months.

One way to keep track is with an app on your phone. For instance, the following apps are budget trackers:

  • Ace Budget offsite link - record transactions yourself and chart your progress.
  • offsite link - a streamlined budgeting app. It even allows you to track expenses by item such as coffee and gas. Your informatoin in encrypted.
  • offsite link - grabs spending information from your credit card and bank accounts and categories them

Don't become discouraged if it takes time to change your behavior to meet your new plan. Think of it like dieting. It takes time to change your eating habits and lose weight permanently. It takes time to develop new spending habits that let you stick to your budget every period.

If it helps, consider becoming disciplined by making spending less convenient. For instance, each time period (week, month etc.), put cash equal to what you can spend on a subject during that time period in an envelope. When the cash is gone, you can't spend more on that item until the next time period. An app, Easy Envelope Budget Aid offsite link is a digital version of the envelope method of budgeting.  You set up virtual envelopes on  your smartphone. The app also allows the data that you input to sync with the smartphones 

If credit cards are the lure to spend more, leave them home, or freeze most of the m in a block of ice in your freezer. To learn more, see How To Keep From Overusing Your Credit Cards.

Step 8. Tweak The Budget As Time Goes Along

At least once a month, compare your actual spending to your budget. If you use the "pocket-money" technique described above, you'll only need to keep track of your receipts for items not purchased with cash. Otherwise, keep a small notebook to detail your spending on a daily basis or keep track on your smart phone.

Keep in mind that your budget is only a road map. Keep it flexible. Read Setting Personal Goals for motivation. Keep your eyes on the goal, whether it is to have an emergency fund, to go on a dream vacation, to work less, or have money put aside for your children.

Change your budget any time you need to.

If, after six months or more, you can't meet your budget despite your best efforts, consider whether it may be the budget, and not your spending habits, which are flawed.

If your income increases, try to save the entire increase.

Similarly, if someone in your household returns to work after a period of being unemployed or disabled, try -- if possible -- to save all of their extra income..