Creating a Budget

Creating and sticking to a budget involves reasonableness, honesty, and discipline.
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Creating a workable budget may appear to be challenging, but it really isn't that difficult. You can accomplish this important task in one of two primary ways. Start at the top and work down -- classic -- or begin at the bottom and work back up -- sometimes called "zero-based budgeting." Building a personal budget involves estimating your monthly cash flow, from jobs, investment, interest earned, or other income, then subtracting your expected monthly expenses.

Estimating Income

If you and your partner work at salaried jobs, your primary cash flow should be easy to predict. Add any other sporadic or consistent income to your monthly salaries. If you are paid weekly, don't forget to multiply your weekly earnings by 4.3, since there are actually 4.3 weeks in an average month (although never in February, of course). Be careful with any investment accounts if they're composed of common stocks, as income or gains/losses on sales can fluctuate dramatically.

Estimating Expenses

This budget area may be a bit more difficult. Components include mortgage or rent amounts, monthly payments for loans, food, utility bills, and other expenses, including auto fuel and repairs, dining out, home furnishings, household items, and the always present and unexpected emergencies. Be conservative by estimating higher rather than lower to avoid unwelcome surprises during the year. Embrace reality and be reasonable.

Monthly Calculations

Always create your budget on a monthly basis. Unless you are a "budgeting guru," creating quarterly or annual budgets tends to confuse more than enlighten. They also make it more difficult to modify or change your estimates to get yourself back on track. Monthly calculations help you monitor and adjust, if necessary, your budget quickly before major problems arise. Your goal should be to create a budget that works for you, within your income limitations.

Top-Down or Bottom-Up

Starting with your expected income and working with, or adjusting, expected expenses is the most direct and easiest way to create a useful budget. If your predicted expenses exceed your projected income, you'll need to decrease one or increase the other to balance the budget. Bottom-up budgeting involves starting with your desired net income and estimating expenses and the needed income to reach your goal -- your desired "bottom line." This method takes a bit more effort and expertise, but can deliver the results you want if you're disciplined and goal-oriented.

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