How to Create a Personal Budget in 6 Simple Steps

A budget is required if you wish to limit your spending and work toward your financial objectives.

A personal or household budget is a summary that analyzes and records your income and spending over a certain period of time, usually one month.

While the term “budget” is sometimes linked with limited spending, a budget does not have to be restrictive in order to be effective.

A budget will show you how much money you plan to bring in, as well as your mandatory costs (like rent and insurance) and discretionary spending (like entertainment or eating out). Rather of seeing a budget as a hindrance, think of it as a tool for accomplishing your financial objectives.

What Does a Budget Do?

A monthly budget is a written financial planning tool that helps you to plan how much money you’ll spend or save each month. You may also keep track of your spending patterns.

Making a budget may not sound like the most thrilling activity (and it is for some), but it is an essential element of keeping your financial home in order. Because budgets are based on balance, this is the case. Spending less in one area allows you to spend more in another, save for a significant purchase, develop a “rainy day” fund, boost your savings, or participate in wealth creation.

📢Important: A budget can only function if you are truthful about your income and spending. You must be willing to work with precise and accurate information about your income and spending patterns in order to create a successful budget.

Finally, the outcome of your new budget will reveal where your money comes from, how much you have, and where it all goes each month.

How to Make a Budget in Six Simple Steps

You must first determine what you are already spending, what you can afford to spend, and what your goals are in order to develop a budget that works for you and allows you to live a comfortable and happy life.

Find a solid template to fill in the data for your costs and income before you start building a budget.

💡Tip: While you can budget your money with pen and paper, using a monthly budget spreadsheet or a budgeting tool is easier and more efficient. These will include defined areas for various kinds of income and spending, as well as built-in formulae to help you figure out your budget surplus or shortfall with little effort.

1. Gather Your Financial Paperwork

• Bank statements

• Investment accounts

• Recent utility bills

• Paystubs

• Credit card bills

• Receipts from the last three months

• Mortgage or auto loan statements

You want to be able to see all of your revenue and spending records. Creating a monthly average is one of the most important aspects of the budgeting process. The more data you can get, the better.

2. Calculate Your Earnings

What kind of monthly revenue can you expect? Using the net income (or take-home pay) figure is OK if your income is in the form of a regular paycheck with taxes deducted automatically. Include any other sources of income, such as child support or Social Security, if you are self-employed. Make a monthly total of your overall revenue.

💡Tip: Consider utilizing the income from your lowest-earning month in the previous year as your baseline income when creating your budget if you have a fluctuating income (for example, from a seasonal or freelance employment).

3. Create a List of Monthly Expenses

Make a list of all the costs you intend to incur over the course of a month. This list might include the following items:

1. Rent or mortgage payments

2. Car payments

3. Insurance

4. Utilities

5. Groceries

6. Entertainment

7. Personal care

8. Child care

9. Eating out

10. Transportation costs

11. Student loans

12. Travel

13. Savings

To track your spending, go through your bank statements, receipts, and credit card statements from the previous three months.

4. Calculate Fixed and Variable Costs

Fixed costs are those that must be paid on a regular basis and for which you pay the same amount each time.

Include payments for a mortgage or rent, a car, a fixed-fee internet connection, trash collection, and regular daycare. Include any additional important expenses that tends to stay the same from month to month if you pay a normal credit card payment.

Include savings and debt repayment as fixed costs if you expect to save a set amount or pay off a set amount of debt each month.

Variable expenses are those that vary from month to month, for example:

1. Groceries

2. Gasoline

3. Entertainment

4. Eating out

5. Gifts

💡Tip: If you don’t have an emergency fund, set aside money for “unexpected costs” that may arise during the month and throw your budget off track.

Beginning with your fixed costs, give a spending value to each category. Then figure out how much you’ll need to spend on variable costs each month.

If you’re not sure how much you spend in each area, look over your credit card or bank statements from the past two or three months to get an idea.

5. Total your monthly earnings & expenses

You’re on the right track if your revenue exceeds your costs. This additional cash allows you to allocate monies to other areas of your budget, such as retirement savings or debt payments.

💡Tip: Consider using the “50-30-20” budgeting method if your income exceeds your spending. In a 50-30-20 budget, “needs,” or necessary spending, should account for half of your budget, “wants” should account for another 30%, and savings and debt repayment should account for the remaining 20%.

If your costs exceed your income, you’re overspending and need to make some adjustments.

6. Make Adjustments to Expenses

If your spending exceed your income, look for places where you may minimize your variable expenses. Look for areas where you can cut back on spending, such as dining out less, or eliminate a category, such as canceling your gym membership.

📢Important: If your expenses are far above your income, or you have significant debt, reducing your variable expenses may not be enough. You may need to trim your fixed expenses and increase your income to balance your budget.

Aim for an equal balance in your revenue and spending columns. This equal balance indicates that all of your money has been accounted for and allocated for a certain spending or savings goal.

How to Use Your Budget

After you’ve established your budget, you must monitor and continue to track your spending in each area, ideally on a daily basis throughout the month. The same budgeting spreadsheet or tool that you used to create your budget may also be used to track your income and expenses.

Keeping track of your spending throughout the month will help you avoid overspending and discover unneeded costs or troublesome spending trends. Rather than waiting until the end of the month, spend a few minutes each day recording your costs.

💡Tip: If you are unsure about your ability to budget your money, use the envelope approach, in which you split funds for spending into separate envelopes for different expenditure categories. When an envelope runs out of money, you must cease spending in that area.

Keep track of how much you spend as you use your budget. When you exceed your spending limit in a category, you must either cease spending in that area for the month or transfer money from another category to meet further costs.

The objective of adopting a budget should be to maintain your monthly costs equal to or less than your monthly income.

Review and Tweak

Circumstances shift. Our priorities alter when we change employment, relocate, and have children. Make a date with yourself every few months to sit down with your budget and ensure that it is still appropriate for your current objectives and reality.

If you’ve already entered your figures into a software or website, you may easily experiment with your budget categories to discover where you can make more room or prioritize one thing over another.

Remember that your budget should serve you, not the other way around.

General Budgeting Tips

After you’ve created a basic budget, you may tailor it to your own financial condition and goals.

1. If you work on commission, save aggressively to assist you get through times when the market is down.

2. If you have cash flow problems because you only get paid once a month, divide your payment into weeks and put the money you planned to spend in the remaining weeks in a different account until you need it.

3. Only use a credit card if you’ll be able to pay it off at the end of the month. Otherwise, you will be charged interest on top of the purchase price.

4. If you realize that you have overestimated or underestimated your spending, make monthly adjustments to your budget. Keep track of major costs that occur just once or twice a year, such as insurance payments.

5. If you have a habit of overspending in some areas, try budgeting tricks like moving to a cash-only budget.

6. Once your expenses are less than your income, set aside money for savings before increasing your spending.

7. Take the time to increase your financial literacy and make your money work harder for you by learning additional financial skills.