If you’re thinking about creating a personal budget, here are six steps to get you started.
Many people believe that earning more money is the key to living well. But if you never pay attention to where your money goes or how much you’re spending, you might end up wasting more than you realize. Even with a high salary, you could find yourself wondering where all your money went.
This is where having a personal budget comes in handy. No matter how much you make, budgeting helps you control your spending and save more effectively. The key is to find a way to track your finances that suits your lifestyle. These steps can guide you in creating a budget that works for you.
Step 1: Determine Your Net Income
Your budget starts with knowing your net income, which is the amount you actually take home after deductions for taxes, retirement plans, health insurance, and other benefits. If you focus only on your gross income (the total amount before deductions), you might overestimate how much you can spend and end up overspending. If you’re a freelancer, contractor, gig worker, or self-employed, it’s crucial to keep detailed records of your contracts and income to help manage any fluctuations.
Step 2: Monitor Your Spending
Once you know how much you’re earning, the next step is to track where your money is going. By categorizing your expenses, you can see where you’re spending the most and identify areas where you can cut back.
Start by listing your fixed expenses—those recurring monthly costs like rent or mortgage, utilities, and car payments. Then, list your variable expenses, such as groceries, gas, and entertainment, which can vary each month. These variable expenses often present the best opportunities for savings. Reviewing your credit card and bank statements can help you easily identify and categorize your monthly spending.
Use whatever is convenient for you—whether it’s a pen and paper, an app, your smartphone, or an online budgeting spreadsheet—to record your daily expenses.
Step 3: Set Achievable Goals
Before diving into your tracked expenses, make a list of your short-term and long-term financial goals. Short-term goals, like building an emergency fund or paying off credit card debt, should be attainable within one to three years. Long-term goals, such as saving for retirement or your child’s education, may take many years to accomplish. Your goals aren’t set in stone, but identifying them can keep you motivated to stick to your budget. For example, knowing you’re saving for a vacation can make it easier to cut back on unnecessary spending.
Step 4: Create a Spending Plan
Now that you have a clear picture of your expenses, it’s time to align them with your financial goals. Compare your fixed and variable expenses with your net income and set specific, realistic spending limits for each category.
You might also want to separate your expenses into “needs” and “wants.” For instance, if you commute daily, gas is a necessity. A music streaming subscription, on the other hand, falls under a “want.” Understanding this distinction can help you find areas where you can cut back and reallocate funds toward your financial goals.
Step 5: Adjust Your Spending to Stay on Track
With your income and expenses documented, it’s time to make adjustments to ensure you stay within your budget and meet your financial goals. Start by cutting back on “wants.” For example, consider having a movie night at home instead of going out. If you’ve already trimmed your discretionary spending, evaluate your essential expenses. Sometimes, what seems like a necessity might actually be something you could live without.
If you’re still over budget, look at your fixed expenses. Could you save money by shopping around for a better rate on insurance? Major changes require careful consideration, so weigh your options carefully.
Remember, even small savings can add up. You might be surprised at how much you can save by making minor adjustments over time.
Step 6: Review Your Budget Regularly
Once your budget is set, regularly review it to ensure you’re staying on track. Your financial situation can change—such as getting a raise, experiencing a change in expenses, or achieving a financial goal. Make it a habit to check in on your budget frequently and make adjustments as needed.
