Creating a budget probably isn’t the most exciting thing on your to-do list, but it’s an important one. Budgeting helps put you in control of your money, make smart financial decisions and create the life you want.
Step 1: Track your spending
Before you create a budget, you need a clear picture of your current spending. Track every expense for at least one to two months using a budgeting app, spreadsheet, online tool or paper and pen. This will help you identify where your money is going, spot common patterns and find areas where you may want to cut back.
Tracking your expenses is one of the most effective ways to build financial awareness and take control over your money.
Step 2: Calculate your monthly income
When determining your monthly budget, you’ll want to use your net income, which is also called “take-home pay” and is the amount you’re paid after taxes and deductions are taken out of your paycheck. This number creates an accurate picture of what you have to spend.
There are two ways to determine your net income, depending on how often you get a paycheck.
Paid twice a month? Multiply the amount of one paycheck by two to get your monthly net income.
Paid every other week? This one requires a little more math. Multiple the amount of one paycheck by 26 (to get your annual net income) and then divide that by 12 to get your monthly net income.
Be sure to take into account all regular sources of income, not just your main full-time job. Perhaps you have income from:
- Part-time jobs
- Alimony or child support payments
- Interests from bank accounts or dividends from stock
- Retirement fund or Social Security benefits
- Unemployment
If your income varies, such as freelance- or commission-based work, coming up with a monthly income amount to base your budget on is going to be more challenging. For a starting point, look back at your income for the last few years and identify the month with the smallest income, or consider averaging your income over several months. Use this for your initial budget to be very conservative in your spending.
Step 3: List your monthly expenses.
Now you are ready to create the actual budget. Start with these standard categories:
- Rent or mortgage payment
- Utilities (electric, water, sewer)
- Internet and phone service
- Car payment
- Gas
- Groceries
- Eating out/entertainment
- Insurance (home, car, life, pet, legal)
- Clothing
- Medical expenses
- Child care and education expenses
- Self-care allowance
- Charitable donations
- Savings
Refer back to the last two months’ expenses you were tracking to make sure you didn’t miss any regular expenses. Enter all projected expenses and add them together to come up with your total projected monthly income.
Step 4: Account for non-monthly expenses.
Some expenses don’t occur every month, but still need to be included in your budget, like property taxes, vehicle registration and maintenance, insurance and homeowners’ association dues.
To include these in your budget, divide the total annual expense by 12 and add it to the expense column on your monthly budget. For example, if you pay $600 for home insurance every year, add a home insurance line and list the monthly expense as $50. That way you are still saving for this expense so you know when the payment comes due, you’ll have the money.
Step 5: Compare your expenses to your income.
Once you’ve listed everything, compare your total income to your total expenses. Are you spending more than you earn? Or do your expenses make it challenging to achieve any financial goals you have (like saving for a specific item or event)? Time to go through the list and identify areas where you can try and cut back.
Review those expenses that surprised you when you first started tracking your spending. Focus on creating realistic changes. Small, consistent adjustments are more sustainable than dramatic cuts.
Step 6: Keep tweaking your budget.
Your first budget doesn’t have to be perfect – and a budget is not a “set it and forget it” type of plan. Especially in the early stages of a budget, you’ll want to review your expenses regularly and make adjustments as necessary.
A great investment of your time.
Learning how to budget your money and save more is a smart move. If you stick with it, budgeting will help you take control of your money – so you can do the things you want to do in life.