How to Create a Budget Easily

Who needs a budget anyway?

If you're always wondering how you'll pay the next bill, feel guilty when you indulge in overpriced treats, and can't find money to put into savings, you probably need a budget.

A budget is not a magic potion that will automatically solve your money problems but it will help you gain financial awareness. That, in turn, will help facilitate more responsible decisions.

Many people think budgeting is overly tedious, and living within a budget means never indulging in a $6 latte or a pair of designer jeans again. The reality, though, is almost the complete opposite. A well-designed budget may take time to create, but once it's up and running, it should take little time to maintain. You'll then sleep better at night knowing you can comfortably cover all your expenses. And, perhaps most shockingly, a reasonable budget allows for the occasional treat—without the guilt.

Here's how to create a budget:

Gather all your financial information

Collect all of your financial documents and receipts for three consecutive months. This includes all account statements, bills, pay stubs, and tickets. You can save all these documents over the three months, or you might be able to access this information online, especially if you're a heavy card user who rarely uses cash.

Tally up your totals

Divide your documents into expenses and income. Then, list the corresponding numbers on a spreadsheet. As you work through these lists, include occasional and seasonal costs, dividing these expenditure groups by 12 to spread them evenly throughout the year.

When you have your numbers, could you see how they match up? In the best-case scenario, your income will exceed your expenses. If the numbers are too close for comfort, or your costs outweigh your payment, you'll need to trim your spending and look for ways to boost your income so you don't end up deeply in debt. You can also review your fixed expenses to see if there's any way to decrease those values, such as refinancing your mortgage to a lower rate, switching to a cheaper car insurance policy, or cutting out a monthly bill you don't need.

List all your needs

Look at how you've spent your money in the recorded time and weed out all the actual needs from your list. This will include fixed expenses like mortgage/rent payments, savings, insurance premiums, car payments, minimum loan payments, childcare costs, and fluctuating but necessary expenses like groceries, clothing, and other dry goods. To simplify it, list your fixed expenses first, followed by your non-fixed costs.

Separating your needs from your wants can get tricky, and you must use common sense. For example, you need to eat, but do you need to eat organic? If this is an essential value to you, the answer may be yes, but if it's something you'd only prefer if possible, it may be more of a want.

As you list each needs, write down its corresponding cost. When you've finished creating this list, add up the total.

List your wants

Your next step will be all about the stuff you love to spend money on but can live without. Include entertainment costs here, eating out, gifts, expensive hobbies, and anything else that costs money but is unnecessary.

Here, jot down the monthly cost of each item on your list and tally up the total when you're done.

Assign dollar amounts to your expenses.

You're now ready to do the nitty-gritty work of budgeting. Open up a new spreadsheet and copy your lists of expenses, starting with the fixed-cost needs, then your non-fixed-cost needs, and finally, your wants. Remember to include your occasional and seasonal fees here as well. Assign a fixed amount to each cost and plan to transfer that amount into a particular savings account automatically. This way, when you need to meet that expense, you have the money on hand to cover the cost.

There are several schools of thought when it comes to creating a budget. To simplify things, we've outlined two of your most popular budgeting methods.

The traditional budget involves assigning a specific dollar amount to each expense category. If your budget allows, simply use the average amount you've spent in each category for the last three months to set the cap for that expense. For example, if you spent an average of $600 on groceries, jot down that number near this category in your budget. Continue until every dollar is accounted for and you have enough money in your budget to cover every need, want, and occasional expense. If your costs outweigh your income, you'll need to trim some payments for your budget to work.

The 50/30/20 budget is more straightforward but requires more discipline. Set aside 50 percent of your budget for your needs, 30 percent for your wants, and 20 percent for savings. If you want to use this budget, divide up your numbers accordingly to see if it can work for you. Does 50 percent of your income cover the total amount you listed for your needs? Is 30 percent enough for your wants? This budget allows for more individual choices each month and less accounting if it can work.

In the future, spend only the assigned amounts for each expense category.

Review and adjust as necessary

Review your budget each month to see if you're staying on track. If you consistently spend less in a category, move some numbers around and pay less in another area so you have more money available to meet your needs. Remember: A budget should be freeing, not restrictive. If yours is not working for you, adjust and tweak it until you can stick to it easily.