Thinking about a budget can be a major stress-inducer. So much so that some Americans are failing to budget at all. According to a 2019 Debt.com survey, 33% of Americans don’t maintain a budget . But simply crossing fingers and hoping for the best when it comes to managing our money isn’t going to cut it when it comes to reaching long term financial goals.
Thankfully, making a budget doesn’t have to be stressful or difficult, and the rewards can be tremendous. Keeping track of your money allows you to prioritize your spending and work towards your goals, whether you’ve got your eye on a new house or a bigger savings cushion.
Gathering All of Your Financial Information
One place to start when making your budget is to gather all the documentation you will need before you get started.
Nothing will derail your budget plans like sitting down at the kitchen table, firing up a spreadsheet, and realizing you actually have no idea how much you pay for internet or when your car payment is due each month.
To help make your budget as complete—and accurate—as possible, gather up as many of the documents you will need in advance.
Ideally, you want documentation showing your take home income and your monthly expenses. Although it could work in a pinch, estimating costs instead of looking at actual numbers means that your budget won’t be as accurate, which can lead to unexpected surprises when it comes to your bank account.
Here are some documents that may be helpful to round up prior to creating your budget:
• Pay stubs
• Rent/Mortgage bill
• Electricity bill
• Water bill
• Internet bill
• Cable bill
• Childcare/School Tuition statements
• Monthly public transportation passes
• Recurring healthcare costs like deductibles or prescriptions
• Student loan statements
• Credit card statements
• Insurance statements
• Recent bank statements
• Subscription services
Figuring Out Your Monthly Take-Home Income
Although you probably can rattle off your annual income without a second thought, making an accurate budget will require you to get down into the dirty details. Take a look at your pay stub to see how much is coming out for things like federal, state, and local taxes, retirement savings, and insurance.
All of these are generally listed on your paystub. The amount left after all of the deductions have been made is your “take-home pay,” or the amount of cash you’ll actually have on hand each month.
Determining your take-home pay is important because if you use your annual income to make your budget, you might end up thinking that you have more money available to you every month than actually shows up in your checking account.
After all, if there’s one thing we can be sure of, it’s taxes. And failing to account for deductions in your paycheck, like those pesky taxes, is one sure way to end up with a budget that doesn’t hold up when it comes time to put it into action.
If you’re budgeting with another person, make sure you know each person’s take-home pay, as well as any additional income such as that from investments or social security. Together, these will give you a good idea of how much actual cash you have to budget with each month.
Tallying Up Expenses
Once you’ve nailed down how much money you’re bringing in each month, it’s time to look at how much money you’re sending out into the world each month. At this stage, it can be helpful to look only at what you are actually spending. This can generally be accomplished by spending some quality time with those documents you gathered in step one.
First, write down how much you’re paying for all your monthly bills, from rent to credit card payments to newspaper and magazine subscription services. It can be helpful to write these down on a piece of paper or blank word document so you can easily reference them when it comes time to plug them into your budget.
Once you’ve got your bills accounted for, it’s time to look at things like food, entertainment, and other discretionary monthly expenses. These can be determined by looking at your account statements.
Once you have a list of all your monthly expenses, add it up. That number tells you what you’re spending each month, and is ideally less than the amount of take-home pay you calculated above.
Writing Down Savings Goals and Priorities
So, now you’ve got a grip on how much money you have coming in, and how much money you’re spending every month. Next comes the fun part: making a plan for your money.
This step involves looking not only at where your money is already going, but where you want your money to go. That’s right—integrating money goals into your budget could help you actually achieve your financial dreams, whether that’s a secure retirement or saving up for that dream vacation.
There are a variety of approaches when it comes to planning for goals in your budget.
For example, with big goals like retirement or saving an emergency fund, your goal may be to set aside a certain percentage of your take-home pay or just contribute a set amount each paycheck.
For example, you might decide you want to contribute 10% of your pay to a savings account and put an extra $100 per month in your investment account.
When it comes to saving up for expenses with a set cost, calculate how much to save each month by determining the total cost, divided by the number of months you have to save.
For example, let’s say you’re planning a dream vacation to Paris in one year. If the vacation will cost $3,000 and you have 12 months to save, you would divide $3,000 by 12, to determine how much you need to save each month to meet your goal. In this case, you would need to save $250 per month in order to save $3,000 in a year. Write down these numbers along with your monthly set expenses so you can incorporate them into your budget.
Firing Up Your Spreadsheet—or an App
Now that you have all your data ready, it’s time to get down to business. Get ready to crunch those numbers and create a budget that will help you reach your financial goals and dreams. One way to create a simple budget is to use a spreadsheet to create columns for your monthly income and your monthly expenses.
In the monthly income section, fill in that post-tax, take-home income you determined earlier. In the expense category, make a subcategory of each type of expenses in your budget.
Here are some sample budget categories that you may see when you look at your budget:
• Maintenance costs
• Home insurance or renter’s insurance
• Maintenance Costs
• Car Loan
• Public transportation tickets or passes
• Taxis or ride shares
• Parking pass
• Insurance payments
• Childcare expenses
• After-school care costs
• Student Loans
• Student Fees
• Eating Out
• Bank fees
• Service Fees
• Credit Card Payments
• Life insurance
• Disability insurance
• Retirement fund
• Emergency fund
• Doctor appointment co-pays
• Prescription costs
• Over-the-counter medication costs
• Movie tickets
• Special events
• Streaming media services
• Team memberships
• Pet insurance
• Food and treats
• Flea and tick preventative
• Vet bills
When it comes to expenses that change from month to month, there is a simple way to determine how much to save so that you’re ready to pay when the bill comes due.
For example, if you pay $1,500 to enroll your child in camp each summer, you can divide $1,500 by 12 months in order to figure out how much you should be saving each month to cover the cost of spending a month in the wilderness.
Once you have your list of income and expenses finalized, total your expenses and subtract that amount from your monthly take-home income. If you are left with a positive number, first of all, congrats, because you are living within your means.
If you have money left over after all your expenses are accounted for, you can give yourself a larger budget in one of the areas of categories—for example adding an extra $100 to your monthly investment plan or an extra $50 towards entertainment.
If you have a negative balance once the math is done, it’s time to dig deep into that budget. Are there places you can cut from in order to make up the difference.
For example, do you really, really need $200 for your clothing budget every month? If there aren’t any areas where you can pare down your budget, it may be time to figure out how to bring in more income to make up that balance.
Maintaining Your Budget
If the idea of opening a spreadsheet or doing long division on scrap paper while trying to make your budget gives you hives, there is good news: there’s an even easier way to create and keep on top of your budget.
With SoFi Relay, you can track all of your money in one place and create savings goals to get you where you want to go—all for free. With SoFi Relay, you can manage your budget from the top down, with deep insights on spending patterns and down and dirty details on exactly where your money is going and how to reach your goals.
Plus, when you open a SoFi Money® cash management account, you can see your weekly spending right in your SoFi app. SoFi Money allows you to see where you’re spending money without having to manually add up every line of your bank statement
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
SoFi Relay is offered through SoFi Wealth LLC, an SEC-registered investment advisor. For more information, please see our Form ADV Part 2A, a copy of which is available upon request and at www.adviserinfo.sec.gov . For additional information on SoFi Wealth LLC, SoFi Relay, and products and services of affiliates, see SoFi.com/legal.
SoFi Money is a cash management account, which is a brokerage product, offered by SoFi Securities LLC, member FINRA / SIPC . Neither SoFi nor its affiliates is a bank.