Finances & Debt

Creating Your First Budget

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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. Here are some basics on how to make a budget. (Think of it as a “budget 101” guide.)

Track your spending.

Track your spending. You have to know what you’re currently spending if you want your budget to be effective – otherwise you’ll just end up guessing on a lot of expenses. Free websites and apps like Feed the Pig, Mint or GoodBudget™ offer tips and/or budget worksheet tools to make tracking expenses easy. Some (like Mint) can even link directly to your financial accounts.

Whether in a budget spreadsheet or other tool, track what you spend for at least two months. You might be surprised at how much of your money goes toward expenses like eating out or coffee runs. Flag any problem areas you see where you’d like to be spending less and keep those in mind as you continue with the budgeting process.

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 is entirely freelance-based or on commission, 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. Use this for your initial budget to be very conservative in your spending. You could also find the average of your monthly income for the past few years and use that as a gauge.

List your monthly expenses.

Now you are ready to create the actual budget. If this is your first attempt at thinking through how to budget, you can use a computer program (Microsoft Excel and Apple Numbers programs both come with simple budget templates), an online tool/app/template, or go old-school and use a pen and paper. 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 school 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.

Account for annual expenses.

The two months of tracking expenses you did may not include some expenses you only pay annually or semiannually, 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.

Compare your expenses to your income.

Enter your projected monthly income from step 2 into your budget. Then take a look between the difference in your income and your expenses. Do your expenses exceed your income? 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. If you noticed you spend a lot on eating out, set a goal that you will only spend a certain amount of money eating out every month. Make sure your goals are realistic – if you aim for “never eating out” when you know it’s going to happen every now and then, you’ll bust your budget and get discouraged.

Keep tweaking your budget.

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.

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