This is probably the question I get asked the most, usually after someone gets a big bill they didn't expect or starts thinking about retirement and realises they haven't saved nearly enough money.
I think it's best to look at your cash inflows and outflows on a monthly basis, since most bills come out every month and four weeks is a short time frame that most people can handle. First, figure out how much money you get each month after taxes. Most of the time, this is how much of your paycheck gets put into your checking account. If your income changes from month to month, take the average of the last three. (Any interest from a savings account would be a bonus.) Next, list out your fixed monthly expenses, such as rent, mortgage, car payment, phone, electric bill, etc. All of these numbers can be changed in the long run, but first you need to figure out your current budget.
Make sure you include all of your bills. Some, like car insurance, water bills, and association fees, are only paid quarterly or annually. Take these costs and figure out how much they would be each month. If your water bill comes every three months, for example, divide it by 3. If you pay for car insurance every six months, divide it by 6.
So now you know how much you make every month and how much you spend every month. Subtract one from the other to get the variable amount of money you can spend however you want for the rest of the month. With the money you still have, make a list of the main things you spend it on: groceries, entertainment, medical expenses, clothes, dry cleaning, personal care (haircut, nails, etc.), and gifts. Put a number next to each of these variable costs that you think represents how much you spend on average each month in that category.
Make as many subgroups as you need to get a good estimate. The better it will work for you, the more it will fit your spending habits. Food, for example, can be sorted by grocery store, fast food, restaurant, work lunch, etc. Then, look through your chequebook and credit card statement for the last few months to find any spending that hasn't been covered yet but is important for your situation.
Now you should have a total for your monthly income, fixed expenses, and variable expenses. When you subtract the two costs from your income to see if there is anything left over, that is the moment of truth. Don't freak out if it's a negative number. It's much better to find out now than to rack up credit card debt later. Most people have something to say at some point in this process, "Oh, so that's where my money is going. I had no idea that cost so much."
Seeing all the numbers written down can help you decide what to do first (and negotiate with all the other spenders in the family). From this first budget, you can start to set monthly spending goals for each category, work on lowering your biggest expenses, and figure out where you should start comparing prices. And did I mention that you should make saving 5–15 percent of your income a fixed cost? You should pay yourself first, yes.
Having a budget is the most important first step in being able to handle your money well. With this tool, you can finally start making decisions about your money based on facts instead of guesses. You can plan for costs so you don't get caught off guard. And most importantly, figure out how to move forward with goals like a big trip, a new car, or investing.
