A budget can be a simple, static document that projects or records your income and expenses, or a dynamic financial tool that lets you make predictions and spot trends. Using a few simple formulas, you can create a budget that lets you balance your spending with your income in advance, and prevent your expenses or income levels from creating a deficit.
Create Your Budget
The first step to avoiding a budget deficit is to create an accurate budget. Do this by listing your expected income and expenses. Use historical records, such as bank account and credit card statements, checkbooks and online financial accounts to review your spending for the past year or two. Divide your expenses into fixed and variable categories and project monthly averages for your variable expenses. Fixed expenses are those that don’t change in amount each month or quarter, such as rent or insurance premiums. Variable expenses change each time and include such costs as utilities, groceries and credit card interest. At the bottom of each monthly column, use a "Total" field to track your monthly spending. At the far right of your spreadsheet, create a "Running Total" column that shows your monthly spending per item. This column will help you track and project your annual spending to help you prevent going over budget.
Examine Your Budget
Once you have created your budget document, enter numbers for each field, such as rent, groceries, wages and bonus. Use historical averages using the documents you’ve gathered and enter estimates for new. Examine the final totals to see if you are spending more than you are earning, if you have a comfortable margin of income above expenses, or if you are cutting it close. If you are cutting it close or running a deficit on paper, adjust your numbers to create a budget that allows you to avoid a deficit.
Project your Annual Income and Expenses
To get a more accurate, real-time projection of your annual income and expenses, create a "Running Average" column to the right of your "Running Total" column. Divide the figures in each "Running Total" field by the number of months that have occurred to get your "Running Average." For example, if you spent $250 on groceries in January, $300 in February and $275 in March, you can project that your average monthly expense for groceries for the year will be $275. You can also get this figure by dividing your "Running Total" column by the number of months that have elapsed. Multiply this number by 12, and you can project an annual grocery expense of $3,300. Create a "Projected Annual" column to track this number.
Plan for Different Scenarios
The main reason budgets end up in deficit is that they do not adapt to changing conditions. After you make your budget, save it under another name and create a budget that shows the same expenses but reduced income. This will help you spot areas you’ll need to cut if your income decreases. Create another scenario with your current income but rising expenses. Create a third scenario that shows rising expenses and decreasing income. In the event any of these scenarios occurs, you will be able to more quickly adapt and decrease your spending accordingly.
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