How to create a personal budget

Creating a budget is a key step in preparing to buy a home and may appear to be a daunting task if you're never made one before.

For some people, the idea of a budget is relegated to CFOs and Congress' squabbles about how to best spend taxpayer money. Personal budgets, on the other hand, tend to involve fewer people - though there may be some debate regarding which expenses can stay. This is not to say making your own budget will be easier, but it does acknowledge there are fewer expenses on the table and you're not making decisions for an entire company or the nation.

A budget is important to the process of buying a home because it helps you determine whether you're truly prepared to own a home based on your finances. Additionally, once you are a homeowner, your budget can assist with staying current on all your bills, including your mortgage expenses, each month.

Here are the steps to creating a budget:

• List your monthly expenses. The first step is to grab a pen and paper and write out what bills you pay each month and how much. Include your utilities, rent or current mortgage expenses, groceries, gas, insurance - renters, homeowners, auto and others - outstanding debts and any other bills. Also, don't forget to note how much you spend for entertainment, clothing and other expenses that may not seem like necessities but you pay for monthly. If you're saving - and you should be - for retirement, emergencies and other financial goals, include these amounts in the expenses.
• List your monthly income. How much money do you bring in each month? This amount can include what comes from your paycheck as well as dividends from any investments you have. If you're married or otherwise in a financial relationship with someone else, make sure your final figure reflects your combined income.
• Determine how much income is left after expenses. Add up all your total monthly expenses. Subtract that amount from your monthly income. If you have a lot left at the end of the month, you may already be doing a good job at managing your spending. However, if the difference is small, the next step can help you expand the gap. There are many free online budget programs in which you can enter your information. They will handle all the math and tell you how much of your income should go to each expenditure every month.
• Evaluate your expenses and set spending goals. Your budget will give you a good idea of where you can reduce spending. Although there are some expenses you can't eliminate - insurance and housing bills, for example - you can look into ways to reduce your costs. This can include choosing a different insurance provider or changing your gas or electricity supplier. Lowering your expenses is one of many spending goals you can set for yourself. You may also want to save more money each month for the property inspection, down payment and closing costs that will come with your home purchase.
• Budget for the future. Considering you want to be a homeowner, you should also make a budget that includes estimated housing costs once you have a house of your own. Your current spending plan may work, but you need to determine if it can handle mortgage payments, utilities expenses, homeowners insurance, property taxes, additional maintenance costs and other expenditures that come with owning a home. If the home purchase breaks the bank, you can start determining which areas of your budget need an adjustment now so you're more prepared to make the actual transition down the road.