Personal Finance

How to Make a Personal Budget in 6 Easy Steps

A step-by-step guide to creating and using a budget

If you want to control your expenses and work toward your financial goals, you need a budget. A personal or family budget is a summary that compares and tracks your income and expenses over a defined period, usually a month.1 While the word “budget” is often associated with restricted expenses, a budget does not have to be restrictive to be effective.

A budget will show you how much money you expect to bring, then compare it to your required expenses, such as rent and insurance, and your discretionary expenses, such as entertainment or meals away from home. Rather than viewing a budget as negative, you can view it as a tool to achieve your financial goals.

What does a budget do

A written monthly budget is a financial planning tool that allows you to plan how much you will spend or save each month. It also allows you to track your spending habits. Although budgeting may not seem like the most exciting activity (and for some, it’s really scary), it’s an important part of keeping your financial house in order. That’s because budgets depend on balance. If you spend less in one area, you can spend more in another, save that money for a large purchase, build a “rainy day” fund, increase your savings, or invest in wealth creation.

Finally, the result of your new budget will show you where your money comes from, how much is there, and where does everything go each month.

How to budget in six easy steps

Before you embark on a budget, find a good template that you can use to fill in your spending and income numbers.

1. Gather your financial documentation

Before you begin, gather all of your financial statements, including:

  • Bank statements
  • Investment accounts
  • Recent service bills
  • Payment receipts
  • Credit card bills
  • Receipts from the last three months.
  • Auto or mortgage loan statements

You want access to any information about your income and expenses. One of the keys to the budgeting process is creating a monthly average. The more information you can unearth, the better.

2. Calculate your income

How much income can you expect each month? If your income is in the form of a regular paycheck where taxes are automatically deducted, then using the net income amount (or the net payment) is fine. If you are self-employed or have external sources of income, such as child support or Social Security, include them as well. Record this total income as a monthly amount.b

3. Create a monthly expense list

Write a list of all the expenses you expect to have during a month. This list could include:

  • Mortgage or rent payments
  • Car payments
  • insurance
  • Groceries
  • Utilities
  • Entertainment
  • Personal care
  • Eat out
  • Childcare
  • Transportation costs
  • Travel
  • Student loans
  • Savings

Use your bank statements, receipts, and credit card statements from the past three months to identify all of your expenses.

4. Determine fixed and variable expenses

Fixed expenses are those mandatory expenses for which you pay the same amount each time. 2 Include items such as mortgage or rent payments, car payments, fixed-rate Internet service, garbage collection, and regular child care. If you pay a standard payment by credit card, include that amount and any other essential expenses that tend to stay the same from month to month.

If you plan to save a fixed amount or pay a certain amount of debt each month, also include savings and debt repayment as fixed expenses.  Variable expenses are of the type that will change from month to month, such as:

  • Groceries
  • Gasoline
  • Entertainment
  • Eat out
  • Presents / gifts

Start assigning an expense value to each category, starting with your fixed expenses. Then calculate how much you will need to spend per month on variable expenses. If you’re not sure how much you spend in each category, check your last two to three months of credit card or bank transactions to make a rough calculation.

5. Total your monthly income and expenses

If your income is higher than your expenses, you will have a good start. This extra money means that you can commit funds to areas of your budget, such as retirement savings or debt repayment. If your expenses are more than your income, that means you are overspending and need to make some changes.

6. Make adjustments to expenses

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If you are in a situation where expenses are higher than income, look for areas in your variable expenses that you can reduce. Find places where you can cut down on your expenses, like eating less, or removing a category, like ending your gym membership. Make sure your income and expense columns are the same. This equal balance means that all of your income is accounted for and budgeted for a specific expense or savings goal.

How to use your budget

Once you’ve set up your budget, you should monitor and keep track of your spending in each category, ideally every day of the month. The same budget spreadsheet or application used to make your budget can also be used to record your total income and expenses.

Recording what you spend during the month will keep you from overspending and help you identify unnecessary spending or problematic spending patterns. Take a few minutes each day to record your expenses, instead of putting them off until the end of the month.

As you use your budget, keep an eye on how much you have spent. Once you’ve reached your spending limit in one category, you’ll need to stop that type of spending for the month or move money from another category to cover additional expenses. Your goal in using your budget should be to keep your expenses at or below your monthly income.

Budgeting Tips

Once you have set up a basic budget, customize it according to your financial situation and goals.

  • If you work on commission, be aggressive about saving to help cover periods when the market is slow.
  • If you’re having cash flow issues because you’re paid only once a month, divide that payment by weeks and save the cash you planned to spend for the remaining weeks in a separate account until you need it.
  • Pay with a credit card only if you will have the money to pay it at the end of the month. Otherwise, you will owe interest in addition to the price of what you have purchased.
  • Adjust your budget monthly if you find that you have overestimated or underestimated your expenses. Be on the lookout for large expenses that only happen every few months, like insurance payments.
  • If you tend to overspend on certain categories, use budget tricks like switching to a cash-only budget.
  • Once your expenses are lower than your income, budget for your savings goals before increasing your expenses.
  • Take the time to learn other financial skills to improve your financial education and make your money work more for you.
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