“A budget is people telling their money where to go instead of
wondering where it went.”
In this guide, I’ll walk you through the step-by-step process of creating a budget that works for you and your financial goals. Whether you’re just starting or looking for ways to streamline your current budgeting process, this guide will help you build a solid foundation for financial stability.
With patience and perseverance, you’ll be on your way to reaching your financial goals in no time!
Table of Contents
- Step 1: List Your Monthly Income
- Step 2: List All Expenses
- Step 3: Calculate The Difference
- Step 4: Divide the Remaining Income
- Step 5: REgularly Balance Your Budget
Step 1: List Your Monthly Income
Understanding your monthly income is crucial for creating an effective budget. This will give you a solid starting point for your budget and ensure a clear idea of how much money you must work with each month.
Here are some sources of monthly income you should consider:
- Regular Paychecks: This includes your salary or hourly wage from your job.
- Side Hustles: If you have any additional sources of income, such as freelance work or a small business, make sure to include those as well.
- Investment Income: If you receive any regular income from investments, such as rental property or stocks, include those.
Once you have a comprehensive list of all your monthly income sources, add them to determine your total monthly income.
This number will be the foundation of your budget.
Step 2: List All Expenses
Fixed expenses are ongoing expenses that MUST be paid regularly, such as rent or mortgage payments, car payments, and insurance premiums. You should also include debt payments, which must be prioritized.
You can learn more in this post about eliminating debt.
These expenses do not vary in amount or frequency and can often be the most significant part of a household budget.
It’s important to create a budget that accounts for all fixed expenses and income.
Variable expenses can be defined as costs that are not fixed and may change from month to month. When creating a budget, it’s important to consider them as they can significantly impact your monthly spending.
To determine variable expenses, it’s important to track and analyze your spending patterns. Begin by identifying your common variable expenses, such as groceries, utilities, and transportation.
To determine the average monthly cost of your variable expenses, review your bank account or credit card statements for the past three months and add the total costs for each variable expense.
Then divide the total by three to get the average monthly cost.
This information will be useful in helping you understand how much you typically spend on these expenses and how much you have left over for other budget categories.
It’s important to keep track of your variable expenses and adjust your budget accordingly.
For example, suppose you notice that you’re consistently overspending on groceries. In that case, you may need to adjust your budget to allocate more money to this category or consider ways to reduce your grocery bill.
Step 3: Calculate The Difference
Add your expenses and compare the total to your monthly income.
If You’re Negative
Take steps to fix this and create a bare-bones budget IMMEDIATELY. To get to a bare-bones budget, we must look at fixed and variable expenses, cutting out everything unnecessary for survival.
You must get yourself a side hustle and increase income ASAP.
Step 4: Divide the Remaining Income
The goal is to have a zero-based budget, meaning your expenses should equal your income. This ensures that every dollar you earn is allocated towards something meaningful, whether debt repayment, savings, or misc category.
Here is a breakdown of all the various categories you can use to budget your money:
This category is a buffer if you overspend in another area or forget to include an expense.
You can set aside a small amount of money each month, like $50, for unexpected expenses. This way, you won’t have to worry about overspending or dipping into your savings or future savings categories.
Remember to keep track of miscellaneous spending so you can adjust this category accordingly in future months.
#2: Emergency Fund
Before you ever spend ANY money on anything else, you should ensure you have a minimum 30-day emergency fund set aside.
Until then, you should limit the amount of money you put into any remaining categories.
Put at least 10% of your monthly income in an index fund or other smart investment.
If you can’t, reduce your spending in other categories or find ways to lower expenses.
#4: Long-Term Savings
Start thinking about what ELSE you’d like to save up for. Whether for a new car, a down payment on a house, or a dream vacation, including these savings in your budget is crucial.
These savings unrelated to the emergency fund should be kept in a SEPARATE account.
First, list your future savings goals and estimate how much money you’ll need for each goal.
Then, determine a monthly amount you can realistically set aside.
#5: Discretionary Spending / Lifestyle
Once you’ve considered fixed and variable expenses, paid off any debts, and set aside at least 10% of your income for savings or investments, you can consider discretionary spending.
This refers to expenses not essential to your basic needs and can be cut back or eliminated if necessary. It’s different from fixed expenses like rent or utilities, as it’s more flexible and can be adjusted based on your budget and financial goals.
When it comes to discretionary spending, there are a few different categories to consider:
- Entertainment expenses include activities like movies, concerts, sporting events, streaming services, or other forms of entertainment.
- Travel expenses cover vacations, weekend getaways, airfare, accommodations, and dining out.
- Shopping expenses include non-essential items like clothing, shoes, accessories, or electronics.
- Hobbies and interests like sports, art, or music require equipment or supplies.
- Dining out and takeout are also considered discretionary spending.
- Gifts and donations to charities or other organizations are also discretionary.
- And finally, personal care services like haircuts, spa treatments, or gym memberships are also considered discretionary.
Discretionary spending can be a great way to add enjoyment and fulfillment to your life, but keeping it balanced with your financial goals is important.
Step 5: REgularly Balance Your Budget
At the end of the month, take five minutes to review your expenses and ask if they added value to your life. This will help you stay focused on what’s important and shift your mindset.
Remember, this is a living document and can be adjusted as your expenses and income change.
Top Budgeting Apps of 2023
Once you’ve created your budget, it’s crucial to stick to it.
Use the True Bill app to track income and expenses, cancel subscriptions, set up a savings account, and budget all in one place.
With Mint’s ability to connect to all your financial accounts, from checking and savings to credit cards, you’ll have a full picture of your finances in one place.
No more manual updates or complicated categorizing – Mint works for you. Your financial information is AUTOMATICALLY updated as it appears in your accounts, and in many cases, spending categories are assigned for you.
Plus, with its visual tools like graphs and reports, you can easily track your progress and make informed financial decisions.
If you’re looking for a budgeting app that can help you track different aspects of your finances, look no further than Personal Capital. This app provides a comprehensive view of your financial situation, so you can see the big picture and track your progress toward your goals.
Investment Portfolio Management Made Easy
Not only does Personal Capital help you manage your budget, but it also allows you to track your investment portfolio. With its objective investment advice, you can make informed investment decisions and reach your financial goals faster.
If you’re looking for personalized suggestions, you can get them for a small fee of 1%.
Budget Pulse is a great alternative if you’re hesitant about giving an online app access to your financial accounts. With this app, you don’t have to worry about giving out sensitive information like your account usernames and passwords. Instead, you can track your spending and set spending goals without risk.
Visualize Your Money with Budget Pulse
Budget Pulse makes it easy to see where your money is going with its charts and graphs. This visual representation of your spending can help you understand your financial situation and identify areas where you can improve.
With this app, you’ll be able to keep a close eye on your spending and ensure you’re staying on track.