A budget can help you reorganize your finances, prioritize spending, and allow you to make progress towards your financial goals.
But how do you make a budget?
While setting up your first budget can seem intimidating, the process actually isn’t as complicated (or as time-consuming) as many people think.
Budgeting simply involves looking at your expenses and income over a certain period of time, typically a month, then using that information to come up with a plan for spending and saving.
If you’re a beginner at budgeting or looking for steps to better budgeting, read on. Below we explain how to create a budget in simple, manageable steps.
What Is the Purpose of a Budget?
A monthly budget is essentially a roadmap for where your money will go so you can make the most of your hard-earned income.
Rather than spending willy nilly (and hoping you will have enough to cover all of your bills), a budget assigns your money a job and establishes limits for specific expenditures, such as food, clothing, or entertainment.
For some people, budgeting could help with paying their bills on time, paying off debts, or saving money for future goals (such as making a downpayment on a home, setting up an emergency fund, or going on a vacation).
Budgets also allow you to track your spending habits, which can offer valuable perspective on where your money is going and help you spot areas where you may be spending more than you realize.
Creating a Budget for Beginners
Setting up your first budget begins with diving into how much you are currently earning and spending each month.
Here are some key steps to help you come up with numbers.
1. Gathering your paperwork
In order to come up with a monthly average for both income and expenses, it’s a good idea to gather up financial statements from the last three or more months, including: bank statements, utility bills, paystubs, credit card bills, insurance bills, loan statements, and receipts.
2. Choosing a budgeting tool
All you really need to create a budget is old-fashioned pen and paper. But you might find it easier to use spreadsheet programs like Excel or Google Docs. Or, you might enjoy using a budgeting app that allows you to sync all of your banking information and can also help you track and categorize expenses.The process can be as low or as high tech as you like.
3. Calculating Monthly Income
Here, you’ll only want to list take-home income. This means the money you’re pulling in from a paycheck after taxes, healthcare, automatic deductions, and any other items are taken out.
If you have any side gigs or other sources of income, such as child support, investment income, or Social Security, you’ll want to include these as well.
You can then come up with an average total monthly income.
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4. Listing Fixed Expenses
This includes expenses that you pay at a fixed rate each month, such as rent, car payments, internet and cable bills, cell phone bills, student loans, etc.
These are generally easy to pin down since they don’t change from month to month.
5. Listing Variable Expenses
This list can be a bit tricker, and where you may have to come up with some estimates and averages. Variable expenses can include how much you spend dining out or shopping for clothes each month, or anything else that fluctuates month-to-month.
You can use your credit card and bank statements to get a sense of variable spending. This may not yield detailed results (since you may not remember what a particular transaction was for), but can be a good jumping off point if you want to get started on your budget right away.
For a more accurate picture, you may want to actually track your spending for a month. You can do this by jotting down every expense as you go, saving your receipts and recording them later, or use a budgeting app that helps you track purchases.
6. Doing the Math
From here, you can deduct average monthly expenses from average monthly income to see how much is left over for savings.
If your income is higher than your expenses, you are off to a good start. This extra money means you can put funds towards other areas of your budget, such as setting up an emergency fund or paying off debt.
If there’s nothing left over, you may need to trim expenses in order to find more money to save for goals or to save for the future. You can do this by reducing one or more categories (such as eating out less) or eliminating a category (such as canceling a gym membership or streaming service).
Types of Budgets
Budgeting isn’t one size fits all. There are several different types of budgeting methods you may want to consider when setting up a spending plan. Some options include:
The Line-Item Budget
A line-item budget is a traditional type of budget, where you use a spreadsheet to list each expense by category, such as eating out, entertainment, etc. The goal with the line-item budget is to set spending targets for different categories and then to keep track of monthly spending as you go to make sure you’re staying within these targets.
You may also want to create a line item for saving and treat it as a fixed monthly expense so you make sure you set this money aside, perhaps in a high-yield savings account, each month.
The 50/30/20 Budget
This is a formula you can use to help determine how much of your income you may want to put towards three major spending categories–needs, wants, and savings.
With the 50/30/20 budget, you would divide your take-home income in this way:
• 50% would go towards “needs,” such as rent/mortgage, utilities, insurance, gas, groceries, and minimum monthly debt payments.
• 30% would go towards “wants,” such as dining out, entertainment, hobbies, gym memberships, and entertainment.
• 20% would go towards saving for future goals, such as paying off all of your debt, saving for an emergency fund, saving for a home, and investing.
Recommended: What Is Zero-Based Budgeting?
With this method, you would allocate money toward savings (and working towards your financial goals) first, and then use the rest however it falls.
For example, if you have a monthly take-home income of $4,000 and want to set aside $700 each month for savings, you’re left with $3,300 per month. You can spend this $3,300 money freely to pay bills, pick up coffee every morning, eat dinner out, or whatever else you need or want, without worrying over what category it falls into.
This budget type can be a good option for those looking to aggressively save money for a goal like travel or buying a home.
Creating a personalized budget — and making sure you stick to the budget — can be a great way to develop good spending habits and ensure that your spending is in line with your goals.
A budget is simply a means of measuring and spending your money in a way that ensures your basic needs (such as food, shelter, electricity, insurance) are met every month, while hopefully leaving enough to fulfill your wants (like shopping, dining out, and entertainment), as well as money for saving for future goals.
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