Tips on How to Develop a Working Budget


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Is This Really Necessary? Developing a family or household budget probably does not rank very high on the list of activities folks would choose to engage in during their spare time. In fact, many people might consider this task to be a chore, not a choice. That mindset can lead to financial chaos, at best, and to financial ruin, in a worst-case scenario.

If you are seeking to improve your financial situation, you won't make much progress unless you change your spending and savings habits. And, until you honestly assess how much money comes in (your income) and where it flows out (your expenses), you won't know which changes are right for your particular situation. That is why you need a spending plan, also called a working budget.

A budget will provide you with a roadmap to financial security. If you drive carefully, perform the right repairs and maintenance along the way, and steadily steer toward your long-term goal, you'll wind up where you want to be!

Where to Begin?

A working budget can be developed at any point in time. Don't feel like you need to wait until the New Year. Use the previous month's income and expenses as the starting point for examining your cash flow. Gather data from your pay stubs, check registries or cancelled checks, bank statements, store receipts, billing statements, invoices and the like. Your goal is to develop an appreciation for how much money is coming in each month and where the money is flowing out.

First, look at the "Money Coming In." You need to know how much money you have to work with each month.

Identify and add up the sources of your typical monthly income. Your primary income source is probably your take-home pay -- that's the amount of money you bring home after taxes, employee benefit plan contributions, etc. are withheld. If you have a spouse who is employed, add in their take-home pay. Now add in child support payments, interest income, rental income, stock dividends or any other sources of money that you typically receive each month.

As you gather your income and expense figures, enter the data into Column A of the charts (Table 1 and Table 2) below and calculate the totals. Or you might find it helpful to go online and access an automatic budget calculator, such as the one offered by ClearPoint Financial Solutions at:

Table 1 Column A Column B
Salary (Net Take-home Pay)

     Yours $ $
     Spouse's or Partner's $ $
Child Support Payments Received $ $
Interest Income from Bank Accounts $ $
Rental Income $ $
Stock Dividends $ $
Other Sources of Potential Income $ $

Next, tally the "Money Going Out." Is it always a surprise when you discover that your paycheck is gone? Developing a budget will give you a clear idea how your money is being spent. It is important to know what proportion of your income goes to essentials (shelter, food, transportation) and how much is spent on non-essentials (cable TV, cell phones, hobbies, eating out in restaurants).

To prepare a list of your monthly expenses, consider those expenses that are fixed, those that are flexible or variable and those that occur periodically.

Table 2 Column A Column B
Fixed expenses are predictable payments you have to make each month. Enter the monthly amount for these expenses. Revised monthly amount
     Mortgage or rent payment $ $
     Condo or homeowner's fees $ $
     Second mortgage or home equity line $ $
Car loan payment 1 $ $
Car loan payment 2 $ $
     Auto insurance $ $
     Medical, dental and/or vision insurance $ $
     Life insurance $ $
     Disability insurance $ $
     Daycare $ $
     School tuition payments $ $
     Child-support payments $ $
     Student loan payments $ $
Consumer loans
     Credit card payments $ $
     Store card payments $ $
     Other consumer loan payments $ $
Flexible or variable expenses are those that may vary from month to month and can be controlled more easily than fixed expenses. Look at your prior months' spending patterns to estimate the typical monthly outlay. Revised monthly amount
Utilities & Telecommunications
     Electric and gas $ $
     Water and sewer $ $
     Telephone land-line $ $
     Cell phones and pagers $ $
     Groceries $ $
     Meals in restaurants and carry-out food $ $
     School lunches $ $
     Lunches at work $ $
     Tobacco $ $
     Alcohol $ $
     Pet Food $ $
Home-related supplies or services
     Garbage pick-up $ $
     Lawn care $ $
     Housecleaning products or services $ $
     Pest control $ $
     Gas $ $
     Parking fees $ $
     Tolls $ $
     Public transportation $ $
Health care
     Prescriptions $ $
     Dental and doctor visits $ $
     Other medical expenses $ $
     Babysitters $ $
     Allowances $ $
     Private Tutoring $ $
     Music/dance/other lessons $ $
     Sports teams/equipment $ $
     Toys $ $
Personal care products and services
     Cosmetics and toiletries $ $
     Barber and beauty shop $ $
     Dry cleaning $ $
Entertainment and recreation
     Cable TV/Satellite TV $ $
     Internet access $ $
     Video rental $ $
     Movies $ $
     Health club dues $ $
     Social clubs $ $
     Hobbies $ $
     Newspapers and magazine subscriptions $ $
Charitable and church contributions $ $
     Emergency Fund $ $
     Savings Accounts $ $
     Investments $ $
     IRA contributions $ $
     Pension $ $
Periodic expenses do not occur on a monthly basis, but are of significance, and need to be anticipated and the funds accumulated ahead of time. Take what you spend annually for that expense and divide by 12 to determine the expected monthly amount to set aside Revised monthly amount
Tax payments
     Delinquent payments $ $
     Property taxes $ $
     Federal taxes $ $
     State taxes $ $
     Quarterly estimated payments $ $
     Oil changes and other maintenance $ $
     New tires $ $
     License, registration or taxes $ $
     New clothing $ $
     New footwear $ $
     New furniture $ $
     Appliance purchases or repairs $ $
     Household maintenance $ $
     College tuition $ $
     School supplies and books $ $
     Professional dues $ $
     Union membership $ $
     Business insurance $ $
     Tools required for job $ $
     Computers/PDAs/cell phone $ $
Health Care
     Eyeglasses, hearing aids $ $
Vacation and Holidays
     Vacation travel $ $
     Gifts for special occasions $ $
     Holiday celebrations/travel $ $
Pet care
     Veterinarian $ $
     Vaccines $ $
     Kennel/pet sitting services $ $
     Legal fees $ $
     Accountant fees $ $

Now, Compare the Two Totals

Look at your Total Monthly Income figure and your Total Monthly Expense figure. This comparison provides a starting point for putting together a budget that will place you on the road to financial stability. Your goal is to formulate a budget that will enable you to meet your current financial obligations, make headway paying off past obligations and start accumulating savings to help you meet future needs that may arise.

Before proceeding, it is time to involve your spouse or partner, if you haven't already done so, in the budgeting process. You and other family members will need to set and abide by specific spending goals in order to reach long-term financial stability. By encouraging their input into the decision-making process, you're more likely to have a successful outcome when you implement the plan. Try to view the budget process as a challenge, rather than a chore, and display a "willing" spirit!

Scenario 1: My Expenses are Greater than my Income

If your calculations show that your expenses are greater than your income, your financial situation is probably on the downward slide. You may not be saving much, if any, money. Unless you envision significant salary increases in the future, your financial picture isn't going to get any brighter without some action on your part. This can be a temporary situation, so don't despair! There are several steps that you can take to bring your expenses into better alignment with your income. By taking positive action, your financial worries will begin to ease as your financial condition improves.

The first option to consider is boosting your income. This doesn't have to entail taking a second job, although that certainly might make sense, depending on your situation. You might consider making an adjustment to the amount of taxes that are withheld from your paycheck, if that is appropriate. And, perhaps a family member could take a part-time job or turn a hobby into a business. Even one-time events, such as holding a yard sale or selling unwanted household goods or possessions through a classified ad or an online auction, can yield income. Do you need the extra home computer, the third car, that fourth family cell phone? If not, sell them or trade them in for less expensive or used models.

The second action to consider is cutting your monthly expenses. Take a good hard look at your expense categories (particularly the variable or flexible expenses). Which ones are "needs" and which are "wants"? Perhaps it would make sense to eliminate certain luxuries (daily coffee break, dinners out, manicures, car washes, new clothing each season, cable TV in every room) for a few months until your finances are under better control. You might also look at your debt repayment practices. Are you paying off the higher interest rate debts first? Would it make sense to consolidate your debt into one monthly payment or find a credit card with a lower interest rate? How about taking some steps to save on home electricity and heating, or researching a cheaper phone provider? Transportation is another major expense that can be reduced. Would it be cheaper, perhaps, to carpool or to take public transportation until gas prices stabilize? Can you find less expensive auto insurance or health insurance?

A third step is to take an honest look at your spending habits. If your budget is going to be effective, you have to commit to building and maintaining good spending habits. If you spend compulsively or without much thought, perhaps you need to restrict yourself to a weekly allowance. Do you borrow from one credit card to pay back other credit cards? Ignoring piles of bills does not make them magically disappear. Are you and your spouse or partner in agreement on how, where and when to spend the family's income? Hiding new purchases from your partner does not contribute to a happy home life. "Here today, gone tomorrow" is not an effective spending strategy.

After completing these three steps, revisit Table 1 and 2. If you have devised a means to expand your income, enter the revised amount in Column B of Table 1, for a new Total Monthly Income Figure. Now, revisit every budget item in Table 2 and record new monthly amounts (in Column B) for those categories where you anticipate you will be able to make reductions. Tally Column B and you now have a new Total Monthly Expenses Figure. Hopefully the two now match, or even better, you show an income that exceeds your expenses. When you're at that point, you can reference the advice under Scenario 2 below.

If your efforts are not successful, and you can't seem to make any headway at compiling a workable budget, there is another option: you can seek a professional opinion from a non-profit credit counseling agency. Certified credit counselors are trained to offer objective advice and can provide a no-obligation evaluation of your financial situation. Just be certain to select a reputable agency. Read tips on Choosing a Credit Counseling Agency offer helpful information on how credit counseling works and advice on how to locate a trained and certified credit specialist.

Scenario 2: My Income is Greater than my Expenses!

If your monthly income exceeds your monthly expenses, congratulations! That means that you are in a position to set some critical financial goals, both short-term and long-term.

Short-term goals are those that you hope to achieve within a year. These might include purchasing a new appliance, trading in your car, paying down your credit card debt or taking a family vacation. If you don't already have an emergency fund (totaling at least three month's of living expenses), an immediate short-term goal should be to begin one. That way, you'll have readily available funds to serve as a buffer in case you suffer a job loss, a medical emergency, an auto accident or another unanticipated major expense.

Long-term goals usually require substantial financial resources and may take years. These would include saving for a house, your child's college education, or your retirement.

After you have set your monthly savings goal, put into practice some smart saving habits.

  • After you pay your fixed expenses for the month, "pay yourself" before you tackle your flexible expenses. This means add to your savings. Set aside money each and every month for your short-term and your long-term goals and watch the money grow. Even a small amount ($10 a week) will grow to more than $500 dollars by year's end.

  • Build your emergency fund so that it contains at least three month's worth of income.

  • Take advantage of employee benefit plans, like 401(k) plans. These plans permit you to set aside pre-tax money to save for your retirement. Some employers will even match your 401(k) plan contributions.

  • Don't settle for just any savings account. Compare interest rates and other fees and features.

  • If you are considering a high yield investment, consult a financial advisor or talk to a reputable financial institution.

Budgets are Living Documents

Don't consider your budget as cast in concrete. It is a living document, so you will want to modify it when the need arises. Check your budget each month to see how close you are to reaching your financial goals. If you find that you've devised a budget that is overly strict (a common error), perhaps you need to loosen up a bit, or reallocate between budget categories. If your actual expenditures are exceeding what was budgeted, you will need to make adjustments to stick with your financial goals.

Remember: Your spending plan can be the key to your financial stability. A budget that "works" will enable you to get the most out of the money you make and that's something anyone can appreciate. 


About ClearPoint ( )
ClearPoint Financial Solutions is a national 501c3 nonprofit credit counseling agency licensed to operate in all 50 states. ClearPoint’s mission is to help people who are struggling with debt regain financial control over their lives through education. Our accredited financial specialists provide budget, housing and bankruptcy counseling in person, over the phone or via the Internet to over 50,000 people a year. They teach consumers how to manage their money better, pay down debt, and save for a secure financial future. ClearPoint is a system-wide Accredited Business of the Better Business Bureau. We are a member agency of the National Foundation for Credit Counseling, and meet the highest standards of the Council on Accreditation

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