What Is the First Step in Budgeting?

What Is the First Step in Budgeting?
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Budgeting is a method of managing expenses by outlining the amount of money being spent versus the amount of money coming in. Budgeting is an effective way to ensure a family does not live beyond their means. A successful budget includes several categories of monthly expenditures and the amount of money available to pay those expenditures. The first step in establishing a budget is to calculate recurring expenses and keep track of the money spent each day.

Start by Calculate Expenses

The starting point for any budget is the calculation of expenses. You can calculate expenses weekly, bi-monthly or monthly, depending on your individual situation. Most recurring expenses such as rent or mortgage, car payments and utilities have a monthly due date so many people calculate expenses monthly. The key to calculating expenses and tracking your spending is to list what your financial obligations are, list what you spend your money on and add everything up to begin creating a budget.

Track Your Expenditures

It is often necessary to track expenditures on a budgeting platform or spreadsheet. This will allow you to list all financial obligations and their respective amounts and due dates. For example, use the spreadsheet to outline the costs associated with your rent or mortgage, insurance, groceries, child care, credit cards, retirement accounts and other expenses you are responsible for paying. Also use the spreadsheet to list spending habits that have nothing to do with living expenses, such as entertainment, shopping, travel and fast food.

Evaluate Your Income

Understanding how much money you have available to pay your expenses is an important part of budgeting. You must take a thorough look at your income to determine if you have enough each month to meet all of your obligations. Many people spend more money than they make or pay bills late because they do not have enough at the time bills are due. Credit cards typically allow individuals and families to spend more than their income. By evaluating your income relative to your expenses, you objectively examine where you can afford to cut expenses and live within your means.

The Time Frame

Because the amount of money spent often varies from month to month, you may need to calculate expenses over a certain period of time to create an accurate budget. For example, many people spend more money in December than they do in other months because the nature of the holiday season encourages spending. During this month, expenses may be inflated because of the extra spending. It is often necessary to calculate expenses during a time frame of several months to determine the average necessary to establish a successful budget.