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How To Create a Budget — And Make It Work!

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January 17, 2014 By Tracie

If you are ready to make a change and work yourself out of debt, one of the most important steps is to create a budget.  Now, before you go any further, it is important that you completed the first step — preparing Net Worth and Debt Pay Down forms.  Once you’ve done that, you are ready to proceed!!

Budget.   I know that this is the other “B” word out there.  However, without a budget, you have absolutely no control over your finances.  This is one of the key tools requried in order to work yourself out of debt and achieve financial freedom.

I have always had a budget.  Well, it was really more of a piece of paper with the bills listed that I had to pay – but not a true budget.  I couldn’t force myself to create one because it made me sick to my stomach to see it on paper — when our bills were paid we had NOTHING left for groceries – or to even be able to eat out.   As my husband I worked our way out of debt, we slowly took off debtors names from the “pay to” list and added in fun things like dine out, vacation, movies, and even SAVINGS.  When you have a budget, you are taking charge of telling your money where it needs to go rather than it telling you where it wants to go.


This is a question that many people have asked me over the years.  I like to actually turn it around and ask you to tell me why you think you don’t.  Do you think you don’t need to remember which bills need to be paid?  Do you think that you don’t need to remember to plan for annual or unexpected expenses?  If you feel you don’t have to do this, then you are right, you don’t need a budget.  However, 99.9% of people need one.

A budget helps you know where you money is going.  It can help you ensure you are saving enough and paying down your debts.  It can help control your spending.  Simply put – a budget helps you gain financial control.  We all know we can’t control a lot of things in our lives, so it is nice to know there is something we can!

Even if you don’t have debt and are financial stable, you still need a budget so you can just monitor your spending and make your money work for you rather than against you.


If you have never had a budget before, you may not even know where to begin.  It can really be scary and overwhelming to get started.  I’ll break it down for you into simple steps so that you can get yours set up and working for you.

1.  BUDGET FORM.   First of all, you need a budget form.  I have created a budget template for you to use.  You can choose the option which works best for you — to print and complete it by hand or use the customizable version, where you can enter your data directly into the form and it will complete the calculations for you.

  • Budget Worksheet  (Customize and save your personalized budget)
  • Budget Worksheet  (Print and complete by hand)

If you want something more high tech, I’d recommend You Need A Budget (YNAB).  You can try it for free for 34 days and then it is $60.  However, I don’t pay for most apps or software I personally use as there is so much out there that is FREE.

2.  INCOME.   Next, look at your paycheck(s) – what we call your Income Source.  Since  your budget is based upon your monthly income, you will have to possibly complete some calculations to reach that figure.  Here are some calculations to help you:

  • Paid Bi-Weekly (i.e. every other Friday):  Take the first 4 income totals and subtotal them.  Divide them by 2 and you will read your average monthly income.
  • Paid Monthly: Take the total of all 4 or 5 pay period and divide by 4 or 5 (whichever you totaled) to reach your monthly income.  (If the amount listed in each pay period is exactly the same, you can just use the monthly income you see).
  • Paid Weekly:  Take the total of the first 4 income periods and that will give you an average monthly income.
  • Hourly or Commission Based (i.e. fluctuating income):  If your income fluctuates greatly from month to month, you will have to revisit your budget more frequently since your income and expenses can vary from week to week.

3.  EXPENSES.   Up next, determine your expenses.  You will want to make a list showing each payee and the amount paid.  In order to ensure an accurate budget, you will handle your fixed expenses differently than discretionary.

Your fixed expenses include items such as your mortgage, car payment, insurance, etc. The things you pay every month which do not change (or only vary in payment slightly).

Your discretionary expenses include those which are not always the same payment (like your mortgage or cell phone bill), take the amount you spent on the past 3 months and average it out reach a monthly figure (i.e. if you spent $500 in October, $600 in November and $575 in December, add those 3 numbers up and divide by 3 to reach an average of $558.33).

Take a look at one of the budget forms from Step 1 to ensure that you did not overlook any of

the items you may need to include.

4.  FILL OUT THE BUDGET.   This is the “fun” part.  Transfer the amounts you have listed above into each spot on the budget.  Your monthly income should go at the top and then the amounts for each expense in the appropriate location.  Those listed on the form are to be used as a guide (reminder if you will) to ensure you properly account for all of your expense.  You can add rows / edit the descriptions as needed.

Subtotal both the income and expenses.  If you see that you are spending more than you take home, then you are short on income and will need to adjust your expenses.  If you are not spending all you make, then you might consider increasing your savings or retirement account contributions.


Yes, tears are common at this point.  In fact, when I saw our budget for the very first time, I cried.  I was actually sick to my stomach.  I could not believe that we were in such horrible shape financially.  However, the tears were quickly wiped away and my husband and I tackled our budget and started to rework the numbers and I started to feel better.  I actually started to feel like I could do it.  It would be tough, but nothing in life worth having is ever easy!

What we had to do was just really look at where we were spending our money.  The first thing that had to go was dining out.  Did we need to dine out every single week?   No.  We wanted to get out of  debt, so we wanted to free up extra income to apply towards our debt.  That was far more important than dinner out.   Eliminating that expense immediately freed up more money which we were able to apply towards other mandatory expenses.

Just take a long, hard look at where you are spending your money.  Even if you are not trying to work yourself out of debt like we were, you might see that you are spending more than you are making.   You will need to eliminate some of your expenses.  The simplest way to do this is to make two lists:  Mandatory and Discretionary.  Go through each item and indicate if it is a mandatory expense or discretionary.

Take a look at your mandatory expenses – like cable.  If you get a high end package, you might want to scale back to basic cable to get your budget to work (or even do this and free up income to pay down your debts).   You might be like us and find you spend a lot of money dining out and can save a lot of money that way as well.

Then, look at your discretionary spending.  Are you paying $50 a month for a yoga class that you go to only now and again?  What about your subscription to that magazine that sets you back $75 a year?  These are luxuries.  They will have to go.   If you are spending more than you make or are trying to pay down your debt,  you can’t afford anything but what it takes to keep a roof over your head, the lights on and food in your family’s stomachs (so to speak).  Trim that budget down to bare bones and you might be surprised to find that extra $100 – $300 or so hiding that you can now start to use towards your debt elimination, or to help put food on the table.

If, once you have adjusted your budget it still doesn’t look right, make more adjustments. If you have already scaled back on everything and it isn’t balancing out, make some calls to your debtors.  Ask for reduced interest rates or how to reduce your payments.  You can also suggest to them a different monthly payment other than the one they are asking you for.  You never know what they will accept if you don’t make that phone call.

You are going to have to make tough choices/changes to your budget to make it work.  As I said, one that we did was dining out. We ate out only about 20 – 26 times for one full year (unless someone else took us out to eat).  Was it hard – Darn Skippy it was!!  Was it worth it?  More than you can imagine.


Once your budget is created, does that mean you are done?  Sorry, but the answer is no.  You will need to revisit your budget at least once per month to make any necessary adjustments.  For most there will not be any to be made, but for some, things will happen to cause your line items to need to be adjusted.  That might mean you will remove something (once you pay down a debt) or may need to add one (saving for that new vehicle).

Budgets are not easy nor are they fun, but once you have one set up and continue to refer to it, it will work.  You will find it helps as you are now telling your money where you want it to go rather than it telling you where it is going to end up each month.  Financial control – such an amazing feeling!

Coming up next week:  How to Create an Emergency Fund (and why you need it before you try to get out of debt).

(I am not a financial advisor and the information listed within these posts is not to be construed a financial advice.   Financial concerns/issues should be addressed with a professional in order to receive advice and assistance.)

Category: Bank

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