How To Create A Budget

Would you like to travel more? Would you like to be able to afford the home that you really want? Would you like to be able to purchase the car that you want? Would you like to have more free money left over each month? If your answer is yes to any of those questions, then you have to create a budget. The key to your financial life lies in your budgetary planning. “Those that fail to plan, plan to fail.” A budget is the greatest predictor of your future financial success. The most financially successful people in the world adhere to a strict budget and you should start to do the same. By following a few simple steps, you can learn how to create a budget and be on the road to financial prosperity!

How To Create A Budget In A Few Steps

What Is A Budget Exactly?

A budget is a financial plan that estimates your income and expenses for a specified period of time. A budget can cover a time period of a day, week, month, or a year. Budgets guide your financial decision making giving you a set of constraints, which limit overspending and allows you to stash extra cash away in your savings and investments. A budget is like Your Financial Playbook giving you a strategy for financial success. A budget helps you to track where your money is going.

What Amount Of Time Should A Budget Cover?

I have found that a monthly basis is the most effective time period since it is a short enough time period that you can adapt to changing financial circumstances yet a long enough time period to engrain habits in your economic lifestyle that encourage you to be financially disciplined. A monthly budget is pretty easy to construct. 

1. Review Your Finances 

Start by tracking your expenses. You need to track all of your spending for 30 days in order to get a handle on what you spend on a monthly basis. You can either do this manually by keeping receipts or writing all of your transactions down on paper but that is a tedious process. The easiest way is to use sites like Mint.com to import all of your financial transactions directly from your bank account and credit cards. You can transfer all of your financial transactions over from the previous month. This will give you a reference point for starting your next month. 

2. Calculate Your Income

A budget starts with determining the total of all of your monthly income. It is important to know exactly how much money you have to allocate each month. Your total monthly income includes all wages, salaries, tips, side gig income, freelancing income, social security, disability income, annuity income, and investment income. Any income that you earn on a monthly basis should be listed on your income. Base your budget on your net pay as that is the amount that you actually take home. Your budget will not help you if based on gross pay which your never actually receive in your check.

3. Calculate Your Expenses

Your expenses include both your fixed and variable monthly expenses. Fixed expenses are your static bills that consistently remain the same on a monthly basis with little variance. Mortgages, car notes, health insurance, and smartphone bills are examples of bills that tend to be fixed for at least a year or more. Fixed expenses are easy to account for because they are predictable from month-to-month. Variable expenses are tougher to predict. An electricity bill can vary greatly from month-to-month depending on your electric use. Credit card bills can jump substantially based on overspending or changes in interest rates. Entertainment expenses are variable based on how often you dine out, go to the movies, or travel on vacation. Calculating your expenses helps you to start getting a handle on your debt.

4. Make Adjustments To Get Your Budget Into The Green

A budget is not a static document. It is always evolving. Make small tweaks to your budget every month. If you are ending up in the red each month, then you need to tighten up your budget. You need to trim some expenses or completely eliminate them. Look over your budget and look for areas of wasteful spending. Maybe you can save money by bundling your insurance packages or by cutting back on your shoe shopping. I canceled my cable subscription when I noticed how much money it was draining out of my budget on a monthly basis. There is always a luxury area that can be adjusted. The trick is being able to admit to differentiate between what is an absolute necessity and what is a luxury. 

5. Stick To It

A budget is only useful if you are persistent. No matter how tempted you are to sway from it, stick to it. It may take a few months to get in the habit of using a budget but after awhile you will get used to it. A properly constructed budget will have cash flowing inside of your accounts instead of going out.

Below I will give an example of an easily constructible budget so you can see how easy it is to create a budget for your own finances.

Example: This is a hypothetical budget for Carl and Jenny Collins. They are a married couple with no kids and an annual household income of $72,000 per year. Carl is employed as a customer service representative and Jackie is employed as a systems engineer. 

As you can see in the example above, the Collins total monthly income includes a monthly salary of $5,500 from their full time jobs and $500 a month from part time bookkeeping work. As stated earlier, their total monthly income is $6,000 per month. Their total monthly expenses equal $5,520. The Collins have a monthly surplus of $480 per month after all of their expenses are paid. This $480 is free money that can be allocated towards increasing personal savings, 401k contributions or to be used for travel and vacationing as a family.

A budget is a great tool for those seeking ways how to get rich or those seeking to learn how to become a millionaire. A budget helps you with getting a handle on your debts as well.

Having a budget allows you to zone in on the areas where you are being frivolous with money and helps you to reduce wasteful spending.

Do you have any helpful tips or insights on different ways of how to create a budget?