Creating a Budget
Step 2: Turning Oranges into Apples
The next step in creating a budget is to standardize all of your expenses. You’ve heard the saying “it’s like comparing apples and oranges”? Well, everyone knows it’s much easier to compare apples to apples! Or in this case, it’s easier to work with expense amounts that are paid at the same frequency.
Standard expenses like rent, utilities and car payments are paid monthly. Once you’re done creating a budget and you're ready to start actually living on a budget, you’ll make your plan work one month at a time. So…I’m going to have you convert all of your expenses and income to monthly amounts.
Don’t worry – it’s a simple process and I’ll walk you through it.
BUDGETING ANNUAL EXPENSES
Start with the expenses you listed in the year column. Divide each amount by 12 and write the result in the month column for that expense. For example, if your car insurance is $1,200 each year, divide 12 into 1,200 and write the answer – 100 – in the month column.
If any of your answers are not even dollar amounts, just round up to the next dollar. Another example: my vehicle license fee is $100 per year. That amount divided by 12 equals $8.33. Rounded to the next dollar, I would list that expense as $9 per month. (Actually I would round that $8.33 up to $10 because it’s a nice round number, and it gives me a little cushion – but that’s just my obsessive compulsive disorder taking over! It’s up to you how far up or down you round.)
Once you’ve converted your annual payments to monthly amounts, move to your semi-annual expenses (6-month expenses) and do the same thing, except this time divide the amounts by 6.
Wasn’t I right when I told you that this step of creating a budget is a simple process?
TURN WEEKLY INTO MONTHLY
Now it’s time to convert your weekly expenses. This is just slightly more complicated because there aren’t an even number of weeks in a month, OR a standard number of days in each month. So to make the conversion easier we’re going to pretend that each month has 30 days. There are two ways to do this – it’s completely your choice.
multiply each weekly expense by 4.3
divide each weekly expense by 7 and then multiply that number by 30.
Let’s look at a couple of examples to help explain.
- With the first method, if my weekly grocery bill is $100, I would multiply $100 by 4.3 because there are approximately 4 and 1/3 weeks in a month. At $100 per week, my monthly grocery expense is $430.
- Using the second method and the same $100 weekly grocery bill, I divide the $100 by 7 to get the average amount I spend each day on groceries – $14.29 per day. Then I multiply that daily amount by 30 (the number of days we’re pretending is in each month) to get a monthly grocery expense of $428.70. Again, I round up this uneven amount to an even $430.
You can see that both methods work out to the same amount, and both are pretty simple to do. Just use the one that you’re most comfortable with.
TOTAL 'EM UP!
Now that all of your expenses are listed as monthly amounts, the next step in creating a budget is to know what your total monthly expenses are. Before we do that, take one last look to be sure that every expense you've listed has been converted to a monthly expense. Now just add together all of the numbers in the month column of your worksheet and enter the amount in the Total box at the bottom of the column.
Congratulations! Your budget worksheet is almost complete. You’re doing a great job learning how to create a budget. Now it’s time to find out if that budget is balanced. Click here to move on to
Step 3: The Balancing Act
Step 1: Identifying Your Expenses
Step 3: The Balancing Act
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