Have you ever thought about what your life would be like if you could finally create a personal budget? No more stress wondering if you have enough in the bank to cover rent. No more inaccurate guestimations at the check-out line. No more wondering where your money keeps going month after month.
In essence, the budget is a plan to make sure you have enough money for your fixed and variable expenses while also supporting your long-term financial goals. Having a private budget you review regularly is a very important element of financial literacy. A budget lets you organize monthly expenses into categories that will help you understand your spending habits and shift them to better reach your goal.
It’s even helped me destroy $33,000 worth of debt in just under a year and a half. Yeah, monthly budgets are powerful.
The process of starting a budget can seem daunting, but it is necessary to your financial health. But it doesn’t have to be that way.
This blog post will teach you how to create your first budget, from tracking bills, student loans, and car payments to crafting a savings plan that works for you. We’ll also go over the best apps for tracking your spending habits and maintaining your habits! Before we create your budget, let’s spend some time talking about the nuts and bolts.
What a budget does
You know from past experience that you can try to budget by looking at your bank account and seeing how much you have leftover after all of the bills are paid, but it’s not always the most accurate method. You might have forgotten that you had a loan, or be unsure about how much is left in your checking account after you’ve paid for everything.
A monthly budget, or written plan, is an information-based financial analysis tool that allows a person to determine how much money to spend for the month.
A good budget does more than track your spending, it’s proactive. What do I mean? Instead of walking into the grocery store wondering how much you can spend (you have some bills that are due in a few days and payday isn’t until next week) a good budget lets you know exactly how much is available to spend in each of your budgeting categories. When every dollar has a job, it’s a lot easier to achieve financial freedom.
A good budget also allows you to know where your money is going, save money, pay down student loans, build an emergency fund, and keep track of all your income and expenses. And no, you don’t need a complicated budget spreadsheet to get started.
Determine why you want a budget
Only a third of households operate on strictly tight budgets. Active budgeters report fewer concerns about personal finance issues than active spenders. Why? Because money is about feelings.
When you make a monthly budget, you are more likely to follow it because your emotions will help you be more motivated. Scientists call this “emotional investment.” You are less likely to cheat and spend money you don’t have when you have self-imposed limitations.
Of course, it’s easy to say that you want to make a budget when the end result is good. But what if there are some consequences? What if your income decreased and your fixed expenses increased by $200 per month? Would you still be able to keep up with everything on your plan?
I ask because creating a budget and managing a budget are two different things. One requires a few easy steps, the other a life commitment. Before you create a budget, make sure you know what you’re getting yourself into. That’s where having a good plan comes in handy.
Make a plan
What is your main goal for creating your budget?
- Do you want to get your debt repayment under control?
- Do you want to rely less on your credit card?
- Do you want to know how much you can realistically save money?
- Do you want to better allocate your income?
Of course, you might have multiple financial goals in mind. However, it’s wiser to pick one goal and go after it with all your efforts. When I first started budgeting, I wanted to look for ways to cut expenses and put more money toward paying off debt.
Now that I’ve achieved my debt payoff goal, my budget is geared toward long-term goals such as building an emergency fund and growing my retirement account.
This differentiation becomes important when time is taken to make any changes to your spending habits – especially when it comes to the finances of the next few months.
Follow the instructions below to create your budget. It might seem like a lot of steps, but it will be worth it when you see how much you’ll save and pay off in debt.
A step-by-step guide to create your first personal budget
A single or household budget is a report that compares and tracks your spending for a specified period. But budgets are not always restrictive. While the word “budget” can sometimes mean you cannot spend money, it does not always have to be. A budget is a way of showing how much cash you need and how much you have to spend on things that you want. Instead of considering your budget as a negative thing consider your budget as a tool to achieve your goals.
This is an important mindset to hold as you begin your journey to sound financial literacy. Let’s look at the 8 steps on how to make a budget.
1./ Gather your financial papers
One essential aspect of budgeting is creating monthly averages. The more data points you have, the better chance your budget will be accurate.
The first step you want to take is to access everything about your finances. Credit card statements. Bank statements. Net income. Paystubs. Print everything out from the past 12 months (or save the files in an easily accessible folder on your computer). Grab some pen and paper while you’re at it. You might need it.
2./ Determine fixed and variable expenses
Now it’s time to know the difference between the two types of spending: fixed and variable expenses.
Fixed expenses are expenses that you will need to pay every month, regardless of what happens in your financial situation. A fixed expense may be rent or utilities and these represent the biggest chunk of spending for people with limited incomes. Fixed expenses don’t change from month to month and they usually stay consistent year after year.
Variable expenses are expenses that can change from month to month or year to year. Examples might be groceries, gas, and credit card payments that only happen every so often but have a big impact on your budget each time they come up.
The easiest way to parse through which expense is which? Start by digging through the past 12 months of your spending history. Note down recurring payments (which you can categorize as fixed) and one-off or less frequent expenses (which you can categorize as variable).
You can use a spreadsheet or the pen and paper I mentioned previously to track down average costs for each of these line items. Note how frequent they appear (example: car insurance is a fixed payment, however, I only pay it every six months. Therefore, I determine the average monthly cost to ensure I set aside enough each month.)
By the end of this step you should have a rough estimate of how much you spend in each category and a few line items to get started.
3./ Calculate your net income
Once you have this information, it’s time to figure out your “net income.” This includes any money coming in from jobs, parents, or situations where the money is predictable and consistent. (We’ll cover how to treat windfalls or sporadic forms of income later.)
If you are self-employed or have external sources of income that are not consistent, use the past 12 months to determine an average monthly income. Err on the side of caution and underestimate your expected income so to not overspend month after month.
Once you know your expense categories and expected income, it’s time to pick a plan that works for you.
4./ Try a simple budget plan
I recommend a popular 50/30/20 budget if you are just starting out for the first time. Basically, this means you divvy up your income into three buckets: approximately 50% towards mandatory expenses, 30% towards discretionary spending, and 20% towards savings or debt repayment.
Using your list of variable and fixed expenses, divide them up into whether they are necessary (like rent and food) or discretionary (like extra clothing or dining out).
This plan allows you to both manage debt (or save more) while also giving yourself wiggle room to indulge occasionally. It’ll also protect you from irregular or unexpected expenses and form better spending habits. As you track your spending trends, you can always adjust how much is divvied up into each category.
If you’d like to learn about other budgeting plans, feel free to check out our no-nonsense guide to budgeting.
5./ Choose a tool to create a budget
I probably should have mentioned this sooner, but to better budget your spending and expenses, there’s no need for an archaic budget spreadsheet. There’s software that can do that for you.
To help you monitor your monthly expenses, I’ve compiled a list of the best personal finance and budgeting apps to help track income and expenses and bring awareness to your habits. This list contains both free and paid options.
You Need a Budget (YNAB) is the best budgeting app I have ever encountered. It’s intuitive, easy to use and features a modern design that makes it easy to input your expenses.
Mint is a free budgeting app that helps you track and analyze all of your finances in one place. It’s a great free option for those who want to keep things simple and manage their money without being bombarded by the latest features.
Personal Capital is a free budgeting app that helps you manage your investment portfolio and displays all of your spending in one place for easy access. It’s great for those who want to see their entire net worth and income picture.
Emma is a more individualized budgeting app that helps you make budgets to fit your lifestyle. It’s great for those who want to input their own data and tailor the plan to their needs.
Wally is a free budgeting app that helps you stay on top of your spending habits and targets the areas where you’re overspending. Great for those who want to save more, but don’t know where the money is going.
Mvelopes is a popular budgeting app that helps you to see your income and expenses in one place. It’s great for those who want to take a more traditional approach to budgeting.
EveryDollar is another great free option for those who want to use a budgeting app that tracks expenses and income in one place.
The biggest thing you’ll want to consider when choosing a budgeting app is how flexible the app is in letting you sort and customize your categories. When you make your budget, you’ll want to be able to separate out things like health insurance and water bills for example. The more granular the app is and the ease in which you can make adjustments will greatly impact whether you keep up with your budgeting habits.
6./ Identify your personal financial goals
Now that you’ve picked an app and taken your first baby budget step, it’s time to go after your financial goals. Most people put in the effort to budget because they want to do achieve something bigger with it.
If you have goals you want to accomplish, knowing your spending habits will make it easier to set aside enough savings toward your goals without breaking the bank (pun intended).
Goals are shown to increase motivation to succeed in multiple studies. According to the research, one of the reasons why goals are so effective is that they provide people with a clear destination to aim for.
If you have some financial goals in mind, it might be a good idea to create some specific savings goals. For example, maybe you want to save up for a car or find extra money to pay down a credit card or contribute more toward your retirement fund.
Create a timeline of when you want to accomplish these goals and set a figure for each. Then calculate how much monthly income you’ll need to set aside for each of the categories. This might require adjusting your spending habits or looking for ways to increase your income.
Either way, the purpose of setting goals is to ensure you’re not mindlessly spending money and instead staying focused on the long term.
7./ Adjust to your variable and fixed expenses
Because you are unique and have different priorities with your money, your spending will not match everyone else’s.
That’s why step 4 is just a recommended plan, no one ever spends exactly 50% of their income on necessities, it’s only guideline. Also, your needs change over the course of a year and so should your budget.
Taking time each month, or better yet, each week, to ensure you’re spending within your budget bounds and making adjustments along the way is critical.
Let’s say you overspent $50 in your “groceries category” but still have $50 extra budgeted for next month’s renter’s insurance bill. Instead of taking your groceries back to the grocery store, you can easily shift the $50 from one category to the other category and know that you are still on track.
The more you keep up with this habit, the more you’ll navigate the financial waves.
8./ Adjust your habits if necessary
Let’s say you’ve kept up with your budget for a few months and notice that your income just isn’t enough to keep up with spending, savings, and debt repayment goals.
Want-to-have expenditures are the first place to cut costs. If those are not enough, you might be able to adjust your fixed expenses. You could be surprised how much money you can save if you make minor adjustments.
Keep checking in
It is critical that you regularly review your budget to make certain you’re staying on task. It’s not the sexiest chore in the world, but it’ll give you peace of mind that you won’t miss your next bill because you overspent your income.
Audit your goals
If you keep noticing you have extra money in one category and want to take advantage of high-interest rate savings accounts, then do it. Make adjustments that fit you and your lifestyle.
Revisit your budget as needed
The secret to a successful budget is to change your habits and make adjustments as needed. Your financial situation is dynamic, just like you are, so be prepared to change with it. The budget you created a year ago might not be the budget you need today.
If your income has increased, are you saving enough? Have expenses gone up too? Do you have goals that are now within reach? Schedule periodic reviews of your budget.
Automate your savings
If you reach a stage in your career where debt repayment isn’t a concern anymore, consider automating your savings. By setting up an automatic transfer to your savings account, you’ll have peace of mind that the funds are there when they’re needed. Even consider upping your savings contributions.
Let’s wrap this up
Now that you have a pretty good idea of how to make your first personal budget, what are some practical things you can do right now?
- Research different budgeting apps and determine which one you think will work best for you.
- Take note of your monthly income and expenses.
- Create a list of monthly expenditures, which includes both fixed and variable costs.
- As you spend money, make sure you change your budget accordingly.
- Keep in mind that it may take time to get used to the new habits, but with time it will be easier to stay on budget.
- Be prepared for the possibility that your income, expenses and goals change over time.
- Consider automating your savings to save time and make sure funds are there when they’re needed.
I hope this article helps you find financial freedom in budgeting!