Five tips for creating your first budget
Creating your first budget? Hamm recommends making high estimates of your costs, prioritizing expenses, and striving to come in under your budget to save money.
A Visa card is shown protruding out of a wallet. For those making their first budget, Hamm suggests overestimating expenses, prioritizing costs and trying to come in under budget to save money.
LM Otero/AP/File
One of the first steps that people take when they first have their 鈥渇inancial epiphany鈥� is that they assemble a budget.
There are countless templates and ideas and forms for making budgets out there, but they all come back to the same thing.聽A budget is a guide to help people make sure that they鈥檙e spending their money in a sensible fashion.
The vast majority of the time, a budget is made up of a list of items that a person needs (or wants) to spend money on during a given month. Each of those items is given an amount and, ideally, those amounts add up to less than the person鈥檚 monthly income. If it does聽not, then it means that some budget elements need to be reconsidered.
A budget based on reality can work really well.聽If you鈥檙e basing every item in that budget on real numbers that reflect your actual spending, a budget can be a great guide to financial recovery.
The problem is that聽when most people sit down to budget for the first time, they don鈥檛 really have those numbers.聽Often, they have no idea about those numbers.
Sure, they can sometimes go pull out monthly bills and figure out an approximation of what their utilities are and what their rent is, which helps.
贬辞飞别惫别谤,听many people who are just making their first budget often have little grasp on how much they spend on food, entertainment, and other expenses in a given month.
If they did, they wouldn鈥檛 be in a situation where they鈥檙e making their first budget.
This leads to another challenge:聽they have to come up with some sort of realistic number for those spots in their budget.聽They have to 鈥渂allpark鈥� it. They want that number to be as accurate as possible, but they don鈥檛 have the resources to nail it exactly. The goal is to create a budget that鈥檚 actually somewhat close to reality.
Here鈥檚 how to make good estimates for your budget when you don鈥檛 have the exact numbers available to you.
贵颈谤蝉迟,听estimate everything high.聽Never, ever lowball a spending estimate. Every time you do that, it will bite you badly.
You can use a budget to encourage yourself to lower spending in a particular area, but that only works if the budget is based on exact numbers, which you don鈥檛 have yet. So, for this first budget, estimate high.
厂别肠辞苍诲,听make estimates of the more important areas first.聽Estimate food before you estimate entertainment expenses, for example.
罢丑颈谤诲,听use known statistics to help you estimate.聽For example, if you鈥檙e trying to estimate your family鈥檚 food cost, I鈥檇 use聽. Since you鈥檙e estimating everything high, I鈥檇 use the 鈥渓iberal鈥� columns.
If you do not have any standardized statistics that you can use, look at your single most recent example of this kind of spending and then expand it out to a month, then add an additional 25%.
贵辞耻谤迟丑,听add in your non-essential categories last and expand them only to fill the available space.聽If that means you have only $40 this month for entertainment, so be it. This is a call to you to figure out how to live for the next month on just $40 for entertainment.
贵颈苍补濒濒测,听remember that your goal is to try to come in聽under聽budget in these categories, which will help you to adjust the budget next month.聽The first month or two probably won鈥檛 provide you with much breathing room in your budget 鈥� nor should it.
What it should do is provide encouragement for you to find ways to live on less money. If you can figure out a way to reduce a budget line item by 10%, that means you can raise other line items as needed.
What you don鈥檛 want to do is go over your line items, especially at first. When you go over a budget item, that means you have to get the money fromsomewhere聽else 鈥� and if the budget is tight, that might be hard to do. That鈥檚 why it makes sense, especially at first, to estimate on the high end, start with essentials, and leave the non-essentials until last because you can control those quite tightly.
Good luck!