Before your eyes glaze over at the thought of budgeting, let me share with you the magic that can happen to your finances when you really sit down and look at your money situation. plan your expensesand learn how to create a budget that fits your finances and your lifestyle.
But first, what exactly is a budget? A budget gives you awareness and confidence in your financial life. When you understand what you’re made of financially, you can take control of your finances and start making positive changes, such as paying off debt, making investments, or building financial security.
A budget also helps you live the life you want by allowing you to direct your spending in the areas that bring you the most joy. A budget doesn’t limit you, it just prioritizes your spending on the things that matter. When you think of a budget in these terms, it can be very expansive indeed.
Want to learn more about budgeting? Read on for our step-by-step guide with tips and tricks to help you do just that.
How to make a budget: step by step
Budgets come in all shapes and sizes, but the basics are the same: choose a time period and list your expected income and expected expenses. Then compare the two numbers. I hope the difference is not negative. And if that’s the case, then it’s important to stick to a big budget. Use these three steps to create a basic budget:
1. Calculate your income
Let’s calculate our profit first. For budgeting purposes, income is basically any expected flow of money into your life.
To estimate total income, write down all sources of income for the current time period (in this example, we’ll use a month).
Examples of income for budget purposes may include:
- Earnings from work or business
- Alimony and alimony
To create a personal budget that accurately reflects your monthly income, you’ll need to calculate your income a little differently depending on your job and pay structure. Use these tips to help:
- If your income from work fluctuates, view your last six months of earnings to get a rough estimate of your monthly income. Throw out the highest month, add up the other five, and divide by five to get the average. In the future, use this number in your budget.
- If you are just starting out with a new salaried jobtake your expected annual salary, reduce it by 20% (for taxes) and divide by twelve.
- If you are an employee, ask more experienced colleagues what to expect, and use the most conservative income you can work into your budget. But don’t forget to also have a plan for when that extra money does come in.
When in doubt, underestimate your income. Don’t worry about getting it absolutely right the first month, you can pick it up as you go. When budgeting, it’s important to remember that it’s a living thing – as your financial and personal circumstances change, so should your budget.
The beauty of a budget is that it can be adjusted from month to month based on actual results and changes in your life situation. In fact, if you drop these numbers in Mint yard budgeting tool, calculating your income becomes a breeze as you can automatically import checking account data to track your cash flow.
2. Determine the costs
Now that our income is down, it’s time to decide how we’re going to spend that money. Let’s make another list.
This time we are going to list all the expected outflows. Examples of expenses include savings, charity, taxes (if you haven’t already taken it out of income), living expenses, and of course, entertainment money.
A good rule of thumb to use here is to put 10% to 20% of your income into savings (pay yourself first!), another 10% to charity, and then meet standard monthly bills – like rent/mortgage, utilities, bills for loans, insurance and other services you have to use every month.
Finally, list any additional expenses – such as dining, entertainment and travel.
To find good estimates for each of your spending categories, review your past expenses. Again, using a budget service like Mint yard can be very practical here as you will be able to import data from previous months. When in doubt, reevaluate your spending.
3. Evaluate: positive or negative?
Now for the big reveal. Compare your total expected income and total expected expenses by subtracting your estimated expenses from your income.
If you find that your total expenses exceed your income, then you will obviously need to cut some of your expenses to make it to the end of the month.
Start with the items you have the most control over, but don’t be afraid to hack bigger items as well.
If you find that you have extra money in your budget, allocate it to whatever spending or savings category you like.
Want to save more? Increase your savings rate. Want to travel more? Expand this category. The beauty of a budget is that it helps you decide how you want to live your life.
Be sure to check your budget against your actual numbers at the end of the month to see how you did.
You will find that in some places you have spent more and in others you have not spent as much as you thought. Make the appropriate adjustments for the next month and move on.
Budgeting Tips: Stick to it
Now you know the basics of how to budget, but for many people, sticking to a budget is the hard part. Some people love to handle data month to month, but frankly, some people will never want to do that.
Online tools like Mint certainly help make the process easier for you, but sorting through last month’s items and making predictions for the next month is still tedious.
If you find it difficult to stick to it every month, switch to a quarterly or biannual review.
Something I’ve found extremely important over the years is just making sure I automatically take care of the important things in our budget first.
For me, saving and giving back is a top priority. We ensure that we automatically save and give back as soon as our earnings hit the checking account.
What happens to the rest of our budget doesn’t really matter as long as we spend within our means (ie not borrowing to support our spending).
Result: take the time to determine what things are important in your life. Then create a budget to help you spend money on these things.
Key takeaways: How to budget
As you walk away with this new numerical know-how, keep these takeaways in mind.
How to make a budget:
- Calculate your income
- Determine the costs
Need additional budget support? Download the Mint program to make budgeting easier and more intuitive than ever.