How to Make a Personal Budget

You wouldn’t start out on a trip without a map. Yet, many of us are on a financial journey without a clear plan of where we want to go and how we’re going to get there. Only 67% of Americans report having a budget.

A personal budget can provide a roadmap for achieving financial goals, from saving for retirement to planning for a big trip.

Some people avoid making a personal budget because they don’t know where to start—others find the idea of tracking every single thing they spend money on overwhelming.

But without a personal budget, the little expenses can quickly add up quickly. That can make it harder to save money for the things you really want to have money for.

What is the goal of using a personal budget? Ultimately, it’s to help you achieve your own financial goals. A budget can help with planning expenses, plotting out where the money goes, and how much you need for a home down payment or a new car.

Here’s some information you might find helpful about making a personal budget.

What is a Personal Budget?

A personal budget is what it sounds like—a budget for your life and personal expenses. This can be as complicated or as simple as you want.

Just like budgeting for a company or a business project, budgeting for your life can let you plan out your finances and spend your money on the things you really want, instead of accidentally spending in bits and pieces and then not having enough left over for bigger goals.

To make a personal budget look at your income and expenses, then allocate money in distinct budget categories and plan ahead to figure out how much is needed for your financial goals.

How to Make a Personal Budget in 5 Steps

Step 1. Track Current Spending

A good first step to making a personal budget is tracking current spending. You probably need to know how much money you have and how much you’re spending in order to make a realistic budget and plan for the future.

Tracking your current spending can also help you identify areas of overspending and measure actual expenditures vs. expected expenditures.

It’s possible to track spending manually by gathering account information and going through last month or the past few month’s worth of expenses—don’t forget one-time expenses that might not have occurred in the previous month, like annual insurance payments.

Step 2. Create Spending Categories

You may also want to determine what categories to track in your spending — groceries, car expenses, housing, medical, etc — and then plot it out.
However, it doesn’t have to be complicated.

Too many categories can actually be counterproductive by making it overly difficult to track and harder to stick to. There are also a growing number of personal budgeting apps and services that make it easier to track expenses.

SoFi Relay allows you to connect all your accounts to one mobile dashboard and track spending habits in real-time.

Step 3. Calculate Recurring Expenses and Discretionary Income

After tracking spending, it is then possible to plot out how much you have in recurring expenses each month — rent or mortgage, student loans, utilities, etc. — and how much discretionary income.

You can review expenses and see where there’s room to trim spending in some places or to put more money towards other things. Creating a realistic and straight-forward budget makes it more likely you can stick to it.

Those with a budget are more likely to spend less than their income — generally a good thing.

Step 4. Set Financial Goals

Then you may want to set financial goals. Setting goals is at the crux of making a personal budget. That’s what separates proactively sticking to a budget from just passively tracking spending after the fact.

What do you want to spend money on? What are your long-term goals, short-term goals, debt obligations? How do you want to prioritize different spending and savings goals?

Talking to your significant other about individual and joint financial goals, even planning a weekly or monthly budget meeting, can help with setting a budget as a couple or a family.

Step 5. Create Budget for Each Category

Once expenses, income, and goals, have been plotted out, you could write down your target budget in each general category for the month. Actually writing down goals increases the odds of achieving them. And then at the end of the month you can evaluate how you did and adjust as necessary.

Tips for Creating a Personal Budget You Can Stick To

•   Simplicity is key to a good personal budget. Yes, you can track dozens and dozens of expense categories and put every single tiny transaction in a different spending bucket, but too often people get overwhelmed by the number of expense categories they’re attempting to track. Keeping it simple cuts down on the time it takes and increases the odds of actually sticking to your budget.

•   The 50/30/20 rule means 50% of after-tax income goes towards essential expenses, 30% goes towards discretionary expenses, and 20% goes towards savings goals. Essential expenses are things like housing, utilities, food, childcare, and medical expenses. Discretionary spending is stuff like shopping, entertainment, and travel. Savings includes retirement funds, like a 401k, and things like emergency funds and long-term goals. While the 50/30/20 rule has been around for years, it was popularized in Elizabeth Warren’s book, All Your Worth: The Ultimate Lifetime Money Plan.

•   Within these broader guidelines, it’s important to adjust a personal budget based on your specific goals and expenses. For example, if essential expenses take up more than 50% of income, then it might be possible to look at spending in more specific categories and see if there are places to cut down on costs, like eating out at restaurants vs. spending your food budget at a grocery store. Or if discretionary spending is taking up more than 30% of post-tax income, then it might be possible to cut down on shopping or miscellaneous expenses.

•   Aligning goals with spending might make it easier to stick to a budget too, because it can make the budget more realistic and motivating. For example, if travel is important to you, then you might want to build your budget accordingly — spending less somewhere else. If you value getting out of credit card debt above all else, then build your budget accordingly — possibly setting aside more money towards that savings goals.

•   One of the biggest challenges people have is sticking with a personal budget after they make one. It can be important to stay on top of tracking your expenses even after you make a budget and re-evaluating the math regularly, like at the end of every month. If you’re struggling to meet your budget targets, then examine the numbers in more detail and adjust. Why are you struggling? Where is the extra money going? One last thing that can help is to spend only what you can see — ie. using cash or prepaid debit cards can limit your spending in a way credit cards can’t.

Common Mistakes in Personal Budgeting

Besides making a personal budget overly complicated or failing to accurately track expenses and align them with realistic goals, there are some other common mistakes when making a personal budget. Here are some common tips that might help you create a budget you can actually stick to:

•   Budget with after-tax income. This is known as net income, after you pay taxes to Uncle Sam. Gross income is the amount you make before paying taxes, but it doesn’t do much good to budget with money you don’t really have. And maybe don’t plan in a bonus or tax refund until you actually receive it.

•   Though you want to be relatively simple in planning your budget, with the 50/30/20 rule, you do want to be accurate in your recording. It’s easy for small expenses to add up — an Uber ride here, a coffee there — and the only way to really know what kind of money you have is to keep track of all the details. Using a budgeting and financial tracking app, like SoFi Relay, can make that easier.

•   Plan ahead, especially for the inevitable. Christmas is always Dec. 25. Taxes are always due on April 15. In your budgeting, you might want to save for the things you know are coming. As much consistency and planning as possible makes it easier to not get caught by surprise and end up blowing your whole budget on Christmas presents.

•   Set goals and be consistent. It’s one thing to track your spending, but without setting targets it’s hard to know if you’re really on track for what you want. If you don’t set long-term goals, then you’re more likely to spend small amounts of money on immediate gratification (new shoes, an extra glass of wine) and then not have that money later. Consider getting into the habit of paying yourself first — ie. including in your budget an amount designated for savings.

The Benefits of a Personal Budget

Maybe this all sounds like a lot of work and you’re not sure why you should bother. It might not seem clear what the goal of using a personal budget is, but tracking expenses and budgeting your spending have a number of benefits — all of which might be helpful in achieving your overall financial goals and all the things you want to do.

Budgeting can help control spending, especially unnecessary spending, by providing feedback. According to one study , consumers who received feedback on credit card receipts spent 9.6% less over the course of the trial than those who didn’t receive feedback.

This is especially important in the digital era. About 60% of all payments these days are made via non-cash methods, such as credit or debit cards. And research shows many consumers spend more with a credit card than they would with cash. They’ll even spend more on the same thing if they buy with a credit card vs. cash. It’s easy to lose track without budgeting. And that’s why, if you’re struggling to stick to a budget, operating with just cash can help.

Budgeting can also reveal opportunities to reduce expenses, either by highlighting where spending is higher than intended or where there might be a disconnect between your financial goals and financial reality.

Creating a budget can also help reduce financial stress by adding structure and clarity. According to a new study , more than half of all millennial respondents said that they were stressed “a lot” or “some” about their debt. A budget can help!

Tracking Your Spending With SoFi

If you need help with tracking your spending, opening an online bank account with SoFi may be a good option. You can easily see your weekly spending in the SoFi app to help you determine if you are on track with your budget.

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Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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