Managing your finances can be a challenging task, especially when you have to juggle multiple expenses, bills, and unexpected costs. However, creating a budget is an effective way to take control of your finances and achieve your financial goals. In this article, we’ll guide you through the steps of creating a budget and provide tips on how to stick to it.
Download our free Bare Bones Budget template to help with the budgeting process.
Step 1: Identify Your Income and Expenses
The first step in creating a budget is to determine your income and expenses. Your income may not include your salary, tips, bonuses, and any other sources of income. Your expenses may include rent or mortgage payments, utilities, groceries, transportation, insurance, and other monthly bills.
Begin by writing down all the income and expenses you are aware of. Since your budget presents a monthly view of your finances, write down your income and expenses as monthly figures.
Step 2: Categorize Your Expenses
Once you identify your expenses, categorize them into three buckets – fixed expenses, variable expenses, and debt repayment.
|Fixed Expenses||Fixed expenses are predictable because they are the same amount each month. These typically include rent or mortgage payments, property taxes, and subscriptions.|
|Variable Expenses||Variable expenses are less predictable than fixed expenses because they are not the same amount each month. These typically include utilities, food, and discretionary spending like entertainment.|
|Debt Repayment||Debt repayment expenses are usually fixed expenses, since their amounts are typically consistent each month. It can be useful to categorize debts separately from fixed expenses in a personal budget so they can be tackled separately.|
Step 3: Set Realistic Goals
After categorizing your expenses, set realistic goals for your budget. Your goals may include paying off debt, saving for a down payment on a house, or creating an emergency fund. Whatever goals you choose, make sure they are specific to you, recognize your financial situation, and are both realistic and achievable.
Step 4: Allocate Your Income
With an understanding of your income, expenses, have categorized your expenses, and have realistic goals written down, it’s time to start putting the pieces together to create your personal budget.
In a budget, you are looking at your finances from a monthly perspective. For each month, start with your total monthly income and begin subtracting off expenses. Subtract off expenses in each category – fixes expenses, variable expenses, and debt repayment – and as you do so, you are allocating your income to these categories.
-$2,000 fixed expenses
-$400 variable expenses
-$250 debt repayment
=$350 left over for emergency fund or saving/investing
Although we used whatever is left over for saving and investing, I would encourage you to flip your thinking on this. Instead of viewing saving and investing as what’s leftover, view it as paying yourself first. This is a critical mindset shift that creates a habit of saving and investing which, over time, can have a huge impact. In this mindset, determining your month income and expenses helps you figure out how much you can have available to save and invest.
The remaining balance after accounting for all expenses is income that’s available to you to reach the goals you set for yourself, so where you allocate these dollars matters. Our personal finance flowchart can give you some good ideas about where to start or where to go next.
Step 5: Monitor Your Budget
Creating a budget is a great first step in your personal finance pursuit. Congratulations if you’ve made it this far!
Consider using a budgeting app or spreadsheet to track income, expenses, and progress toward your goals over time. You can also review your budget at the end of each month to see if you stayed within your budget and adjust accordingly.
Tips for Sticking to Your Budget
Creating a budget is only half the battle and we hope you’ve seen it’s an easy process. Sticking to it can be more challenging. Here are some tips to help you stick to your budget:
- Avoid impulse purchases – before making a purchase, ask yourself if it’s necessary and fits within your budget.
- Use cash envelopes – Consider using cash envelopes for categories like groceries, entertainment, and clothing. When the cash is gone from an envelope, stop spending in that category until next month.
- Automate your savings – Set up automatic transfers to your savings account to ensure you’re consistently saving money.
- Review your budget regularly – Review your budget regularly and adjust as necessary.
- Find free or low-cost activities – Look for free or low-cost activities to do, such as hiking, reading, or attending community events.
Creating a budget can be a daunting task, but it’s quite easy. Your personal budget is essential for financial stability. By following these steps and tips, you can create a budget that works for you and achieve your financial goals.