Creating a budget is like having a roadmap for your money – it helps you manage your finances and reach your financial goals. When you’re getting started with budgeting, you might wonder: How can I make a budget that’s easy to create, keep track of, and update? What steps should I follow to make sure my spending and saving align with my income and stay up-to-date?
Making a budget allows you to see where your money is coming from and where it’s going. It helps you decide where to spend your money and how much to save for the future. In this article, we’ll guide you through a simple 5-step process to create a budget and offer advice on making it work for you.
Step 1: Determine Your Income: Very First Step to Creatе a Budget
The initial step in creating a budget is understanding your income. To do this, start by figuring out how much money you earn each month. Calculate your net income, which is the amount you make after deducting taxes.
Consider all the money you regularly receive, such as your salary, freelance earnings, or rental income. It’s crucial to include every source of income to have an accurate understanding of your financial situation.
Determine Your Income from all Sources
If you receive a regular paycheck from your job, whether it’s part-time or full-time, the amount mentioned is likely your net income.
Keep in mind that if your job provides health insurance, a flexible spending account (FSA), or a retirement plan, these amounts are usually automatically deducted from your paycheck. To get a clear view of your take-home pay, subtract these deductions.
Create separate budget lines for each salary you and your spouse earn, along with any additional income. Remember, you’re working with net income, which is what you receive after taxes and other deductions. Here’s an example:
- Your First Salary: $2,500
- Your Spouse’s First Salary: $1,500
- Your Second Salary: $2,500
- Your Spouse’s Second Salary: $1,500
- Side Hustle Income: $1,000
- Total Income: $9,000
If your side hustle income varies, look at the earnings from the past few months and use the lowest amount as the expected income for this month. If your income increases later in the month, you can adjust your budget accordingly by adding the extra funds to specific budget categories.
Step 2: Track Your Expense: Crucial to Manage, Plan and Make a Budget
Keeping tabs on your expenses is vital for building an effective budget. After you’ve figured out how much money you have coming in, the next important step is to understand where it’s going. When you create a budget, tracking and categorizing your expenses will help you identify areas where you’re spending the most money and pinpoint where you can potentially save.
Track Your Expense
Keep a record of your daily spending using whatever you have on hand, like a pen and paper.
Start by listing your fixed monthly expenses, such as rent or mortgage payments, utilities, car payments, and loan payments. Then, list your variable expenses, which can vary each month, including items like food, gas, groceries, dining out, entertainment, and transportation. Be thorough and record every expense, no matter how small. This is an area where you might find opportunities to save money. Credit card and bank statements are useful references as they often detail or categorize your monthly expenses.
Step 3: Categorize Your Expenses
Once you’ve tracked your expenses, it’s time to categorize them. Create categories like housing, transportation, groceries, debt payments, entertainment, and savings. This helps you visualize where your money is going and spot areas where you can cut back or make improvements.
Now, everything starts coming together: your actual spending versus your intended spending. Use the fixed and variable costs you’ve recorded to estimate your upcoming monthly expenses. Then, compare it to your net income and priorities. Consider setting clear (and realistic) spending limits for each expense category.
You might also want to categorize your expenses into necessities and discretionary items. For instance, if you commute to work daily, fuel is a necessity. On the other hand, a monthly music subscription might be considered a discretionary want. This distinction becomes important when you’re figuring out ways to allocate money toward your financial goals.
50/30/20 Budget Rule is a simple and easy-to-follow guideline that can assist you in creating a realistic budget to help you achieve your financial objectives.
Photo credit: Bank of America
Step 4: Set Financial Goals
When you’re planning your budget, it’s important to think about what you want to achieve with your money. This could be things like paying off debt, saving up for a home, or having some money set aside for unexpected expenses. Set clear goals that make sense for your income and spending.
Before getting into the nitty-gritty of your budget, make a list of the things you want to achieve in the short term (like in the next one to three years) and the long term (maybe saving for when you stop working or for your kid’s education). Your goals don’t have to be set in stone, but having an idea of what you’re working toward helps you stick to your budget. For example, if you know you’re saving up for a special trip, it’s easier to cut back on spending. So, having a plan for your money is really important.
Step 5: Make Adjustments and Stick to Your Budget
Creating a budget isn’t something you do just once – it’s like a continuous task. You need to keep an eye on it regularly and make changes to stay on track.
When you start budgeting, keep track of what you spend. You can do it every day, after you leave the store, or once a week – whatever suits you. Make changes as you go. It’s your spending plan, so make it fit your needs. If one thing costs more than you thought, spend less in another area. If you save money, use it to reach your money goals or cover overspending in another place.
Check your budget often and make changes for any money or spending changes. It’s really important to stick to your budget and not spend too much.
Watching your budget is something you do all the time, not just once. By keeping track of what you spend, you stay in control and can make changes when you need to. That way, you always know where your money is going.
To make budgeting simple, use tools like apps or even a basic Excel sheet. It’s about finding what works best for you to keep budgeting easy and manageable.
Even before you go ahead and work to create a budget, it is important to understand basic personal finance terns. You can learn about these key basic personal finance terms and jargons in one of our personal finance blog on 35 Essential & Basic Personal Finance Terms You Need to Know.
By following these 5 steps, you can create a budget that will empower you to take control of your finances and achieve your financial goals. Remember, budgeting is a skill that takes time and practice, so be patient with yourself. Start today and enjoy the benefits of financial stability and peace of mind.
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