Now that you know more about your income and expenses (see the articles on “Average Income” and “Expenses), you can fine tune your budget by selecting the budget type that best fits your financial style, and incorporating income and expense calculations.

First, create expense or allocation categories for your expected spending during the budgeting period you would like to schedule. If you are using the income-and-expense budget, you will need to know when the payments for each expense are due. With the zero-based budget, you will have to ensure all of your income is allocated in all three expense areas and various categories. You should also include an emergency or “overflow” allocation or deduction, so that you have funds set aside in case of fluctuations in expenses.

Additionally, periodic expenses are handled differently in each type of budget. With income-and-expense budgeting, you will divide the annual payment by 12 or as many budgeting periods as you have in one year, and then set aside funds to be used when they become due. In a zero-based budget, you will divide the annual payment by the number of months or periods before it is due; essentially, you will be allocating a larger amount each budgeting period for the annual payment, but you will still ensure you have enough when it comes due.

After you have coordinated your average income with your expenses by either allocating all of it toward various expense categories, or by deducting all expenses away from it, you may find that you have deficits in which all of your income has been deducted or allocated away before all fixed, variable and periodic expenses have been paid.

If you are finding that you are overextended in certain expense categories you will probably overspend once you implement your budget. Keep in mind that variable expenses are the ones that most people are poor at tracking and managing, so consider how you can minimize this type of spending. Additionally, if you have high interest rates on your credit cards, you could be losing some income to accrued interest. Finally, see if you can lower the cost of some fixed expenses, like your car or health insurance.

No matter what you do to minimize costs to close the deficit between your income and expenses, be sure to keep your proposed budget flexible, so that it won’t be painful to adhere to it.

If you have leftover funds even after expense allocations or payments, see “What to do with Budget Surplus” to allocate or set aside income properly.

References

Mgichome.com. Develop a Budget
Chicagofed.org. How to Budget and Save
Gettingfinancesdone.com. 3 Reasons Most Budgets don’t Work
Gettingfinancesdone.com. What is a Zero Based Budget
Erin Huffstetler. Debt Free Living