A little over two months ago, when I started this blog, I talked about how a budget wasn’t the first thing you needed. Instead, I said the first thing you had to do was to start tracking all of your expenses.

Then, in late May I talked about how a budget was not the second thing you needed. Instead, I said, you needed to know your money goals. A couple days later I talked about the difference between cash flow and budget, and that I thought doing your cash flow was more important, from a right here, right now, let’s not get overdrawn perspective.

Would you believe that it’s finally time to talk about creating a budget?

If you’ve been following along, you should have the following three things necessary for creating your budget:

2 months of money tracking – everything that’s come in and gone out

Your goals – short and long term, with a basic idea of how much money you need for each

Cash flow for the next month – make sure money is going to be in the account when you need it to be.

So how do you start?

Look at your two months worth of budget tracking and start dividing your spending up in to categories that make sense for you.

My categories are:

Student Loans

Current College Costs

Bills (mortgage, cable, etc)

Car (gas, new tires, etc)

Credit Cards

Groceries

Medical

Eating Out

Allowances

Pets

House

Misc

Savings

Income

My categories have come about after years of refining. They are not the same as they were last year, and may be different next year, so please don’t feel confined by them. I don’t.

You need categories that work for you. If you have kids, you might want a kids category. Some people divide their groceries out between food and household items (toilet paper, cleaning supplies, etc). I don’t. In fact, my grocery budget also includes dog food. My “Pets” category is for vet appointments or toys/treats that aren’t part of our regular spending.

Some people may include their mortgage in the “House” category, but for me that’s for home repairs (fixing the furnace or hot water heater) and buying new items for the house (new dishes or overhead lights).

The important thing is to find categories that work for you, and assign your spending to that category.

Once you have everything divided out by category, you can figure out how much you spend on each per month.

Add up everything you spend, and then all your income. Is there money left over?

Now look at where you’re spending your money. Does it line up with your goals? If it doesn’t, or if you’re spending more than you make or just barely squeezing by, its time to look at what category you can cuts costs from.

How much have you spent in Misc? or on Eating Out? Do you have an Entertainment category? What did you spend on that?

These are some of the quickest/easiest places to cut spending, but don’t cut it down to 0. As I’ve mentioned before, your chances of sticking long term to a budget that doesn’t give you any wiggle room are pretty low.

Other places you can look to cut- do you need that really expensive cell phone/data plan? Can your cable be cut?

Does a lot of food go to waste at your house? Do you shop sales or use coupons? A lot of people (and I’m not talking about the extreme couponers from the TLC show, but regular people) are really able to cut their grocery budgets down by smart shopping. (I do caution about shopping all over town, though. Make sure that the extra gas usage/wear and tear on your car aren’t negating the grocery savings.)

THIS IS THE HARD PART. You have to be honest with yourself. Don’t try to do it all at once. Take baby steps. And be prepared to come back and tweak your budget next month, and maybe the month after that, and to revisit anytime something changes.

Creating your first budget is the hardest part, but the work isn’t done.