Note: This is the final post in a five-part series on creating a budget. If you missed the first four parts just click the links below to review those before moving on to this step.

Part 1: Expenses

Part 2: Income

Part 3: Balance Your Checking and Savings Accounts

Part 4: Determine your Spending Categories

Here’s an overview of our steps to creating a budget:

1. Write down your expenses.
2. Write down your income.
3. Balance your checking and savings accounts, including cash on hand.
4. Determine your spending categories.
5. Create your spending and savings plan (aka, a Budget!).

Up to this point we’ve focused on gathering all of the information needed to create a budget. Last week I challenged you to continue working through ways to close the gap between your income and your expenses, and to have a meeting with your spouse or your trusted friend or family member to discuss how your habits have changed over the last few weeks. If you haven’t had that meeting, take a few minutes to do so.

Now we’ll move on to the final step in creating a budget, Step 5, create a spending and savings plan (aka, a Budget!).

In step 4 we determined our spending categories and numbered them by priority. Let’s go through each category together and see how much is recommended we spend in each, writing amounts into those categories as we go. Note: You can either start with a fresh sheet of paper or add a column to the sheet you used in step 4.

Charity

If you aren’t already giving, it’s not too late to start! God requests 10% of our increase to be returned to Him, and it’s important to take this 10% out before you spend anything else. Believe me, there is such a blessing and so much joy in giving. God wants to bless you with more than you can imagine. Take a look at Malachi 3:10: “‘Bring all the tithes into the storehouse, that there may be food in My house, and try Me now in this,’ says the Lord of hosts, ‘If I will not open for you the windows of heaven and pour out for you such blessing that there will not be room enough to receive it.'” Isn’t that a great promise? And I can attest to you that we have experienced the overabundance of blessings that God wishes to bestow upon His children who give. Offerings are those amounts given above and beyond the 10% tithe.

You can calculate your 10% more than one way, but the most popular ways are to take it straight off the top from your gross income (that amount before taxes and deductions on your paychecks) or from your disposable income (the money you actually get to spend after you get paid). Either way, the amount you give should be prayed about and determined between God and you and your spouse. Don’t forget to include other sources of income outside your regular paycheck. Write the amounts you decided on in next to the tithes and offerings categories. Recommended percentages for the Charity category is 10-15%.

Saving

The most important thing you can do to avoid future disaster is to have an emergency fund. This fund will be used to pay for unexpected repairs, medical expenses, car and housing emergencies, etc. Your goal to start with is $1000. With your spouse, discuss how long you think it will take to reach $1000 for emergencies. Remember, your goal should be to reach this as quickly as possible, even if it means working a few extra hours a week or picking up a second job for a few months. Divide 1000 by the number of months you decide on and write that amount next to the Emergency Fund category.

Other savings categories include retirement and college funds. You may already be contributing to an employer’s retirement account [a 401(k)], and if so don’t forget to take advantage of your employer’s matching contribution if they have one. Only place an amount in the retirement category if you are contributing to a retirement account outside of the deductions from your paycheck. If you have kids and plan on helping them pay for college, add an amount to this category as well.

Important: If you are in debt, pay off those credit cards and loans before contributing to retirement and college funds! Once your debt is eliminated, work towards saving 3-6 months of living expenses for a full emergency fund. Recommended percentages for the Saving category is 10-15%.

Housing

Go back to your list of fixed expenses. Write the amount for your mortgage or rent from that list into the Mortgage/Rent category on your sheet of paper. Next, if you are a homeowner you will need to determine your amount of property taxes. Take the yearly amount due and divide that by 12 so you can set aside some funds each month to pay those taxes when they come due. Then ask yourself if anything in your home will need repairs or replacement in the foreseeable future. Do some research to determine how much those will cost and divide the amounts by the number of months you have left until those repairs will be needed. Add those amounts to the Repairs/Maintenance category. Recommended percentages for the Housing category is 25-35%.

Utilities

Write the amounts from your list of fixed expenses here. These will include electric, water/sewer, trash, phone, internet, and cable. Recommended percentages in the Utilities category is 5-10%.

Food

How much do you plan to spend between groceries and eating out? Have you subscribed to any food delivery services? Be sure to include any bulk purchases you make on a regular basis. Recommended percentages for the Food category is 5-15%.

Clothing

Everyone needs to have clothes to wear, and clothes (and shoes, too!) don’t last forever. You don’t need to spend a lot on clothing, but you do need to set aside something every month for those times when you need or want to do some clothing and shoe shopping. Kids always seem to need new clothes and shoes, but don’t forget about yourself either. Recommended percentages in the Clothing category is 2-7%.

Transportation

For many people, this will be one of the larger expenses, outside of housing and food. If you own your own vehicle you’ll likely need regular oil changes and other routine maintenance, and you’ll eventually need to replace that vehicle. If you take public transportation, you are likely paying a monthly transit fee or regularly paying for a taxi service. And don’t forget to estimate the amount of gasoline or diesel you purchase each month.

For example, let’s look at oil changes. Manufacturers recommend changing your vehicle’s oil every 3000-5000 miles. How many miles do you drive per month? Take that amount and divide by your vehicle’s recommended mileage between oil changes. That’s how often you’ll need to pay for an oil change, or buy the things necessary to change it yourself. For example, say we drive about 1500 miles per month. We change our oil every 4000-5000 miles, so we would need to change the oil in our vehicle every 2.5 to 3 months. One oil change costs us $75, so we need to set aside $25 – $30 a month for this expense. Use this same method to estimate the amount needed to replace tires. Add these amounts to your Oil/Repairs/Maintenance categories.

You’ll need to replace your vehicle at some point, and paying cash is the best way to go (because no one really wants to be in debt). What kind of vehicle would like next and how much are you willing to spend? How long do you have until your vehicle needs to be replaced? Take the purchase price of your next vehicle and divide by the number of months until you purchase that vehicle. Add that amount to the car replacement category on your sheet of paper. The recommended percentages for the Transportation category is 10-15%.

Medical/Health

This category includes any out-of-pocket medication and doctor expenses, including those for dentists, chiropractors, optometrists, and other health specialists. This will also include any nursing home and long term care expenses that your insurance doesn’t cover. Recommended percentages for this category is 5-10%.

Insurance

This is a broad category that includes anything you pay premiums for as protection for the future. If you have minor children or others dependent on your income, life insurance is so important to have. You also want to insure your and your children’s health in the forms of health and dental insurance, disability insurance, and long-term care insurance, among others, as well as your property in the form of vehicle insurance and mortgage/renter’s insurance. If you already have mortgage or renter’s insurance and pay that yearly, divide that amount by 12 and add it to the appropriate category. Do the same for any other insurance you pay for that is not included in your paycheck. Recommended percentages for the Insurance category is 10-25%.

Recreation

This category includes entertainment and hobbies, as well as a vacation fund if you choose to have one. If you love to golf, a new set of golf clubs would be paid for from this category. Movie theater tickets, concert tickets, museum and zoo passes, all belong in this category. So do book and DVD purchases. Recommended percentages for the Recreation category is 5-10%.

Personal

Another broad category that includes everything from toiletries to child care. This is basically a catch-all category for anything not listed in the categories above. Think of all the things you pay for on a regular basis. Bath tissue, shampoo and conditioner, a new brush? How about child care or the occasional babysitter? And those school fundraisers that always seem to pop up every couple of weeks. If you home school, determine how much you pay for curriculum each year and divide that into 12 “payments” to set aside until you purchase that curriculum. You could also include gifts, new furniture, and toys in this category. Recommended percentages for the Personal category is 5-10%.

Debts

This is the most important category to focus on after housing, utilities, food, and transportation. List every loan you have that is on your fixed expenses list. Car loans, credit card balances, student loans, medical debt, and any other personal loan you have. Write each of these loans and each credit card on its own line under the Debt category. Until all of your debt is zero, recommended percentages for this category is 5-10%.

Whew, that was a lot to take in! You should now have a number written next to each category or sub-category. Take a moment to look over each one. Next we’ll see how realistic each of those numbers are based on your income. Add all of the amounts from the spending categories together, then subtract that from the income you determined from step 2. If the result is anything other than ‘0’, you need to do some adjusting. Either reduce your expenses or increase your income until your budget shows ‘0’ at the bottom, staying within the recommended percentage ranges for each category. For example, our income from step 2 is $2000/month. We’re also showing a mortgage/rent payment at $1000/month. Mortgage/Rent divided by Income equals 50%! Clearly we need to find a cheaper place to live or increase our income by 15-25%.