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The Best Way to Create a Budget

  • 4 min read

Smart personal finance always starts with a budget. There’s no better way to control spending and make progress toward your financial goals. A budget is simply a financial summary that tracks your income and expenses for a defined period of time.

A budget doesn’t necessarily have to be restrictive to be effective. Just by gaining a clearer picture of where your money is going each month will equip you to make better financial decisions going forward.

Your monthly budget will serve as a financial planning tool that allows you to plan exactly how much money you will spend and save each month. It will also allow you to track your spending habits and make adjustments as necessary.

1. Gather all financial paperwork.

The first step involves gathering up all your financial documents. At a minimum, this typically includes recent bank statements, bills, and paystubs. If you have investment accounts, cash receipts, or any other financial documents, be sure to include those as well.

Any information about your income and expenses will be helpful. Ideally, you should gather at least 3 months worth so you can calculate a monthly average for each expense.

2. Create a budget template.

This one is really about personal preference so use whatever you’re most comfortable with. You can download a template online by simply googling “budget templates” or you can download any number of free budgeting apps for your phone or computer. 

If you prefer using good old pen and paper, that’ll work too! The fields are fairly straight forward. You’ll want to include the time period, income, and expenses. Each of these will be broken down further below, but the key to sticking with anything is to keep it as simple as possible.

You’ll want to keep a record of budgets from previous months to better inform your anticipated expenses for the current and future months. This can be achieved with a budget notebook or simply keeping a folder with files for each month on your computer. If you’re using an app, then it’ll likely handle the record keeping for you.

3. Calculate your monthly income.

This includes all the money you having coming in each month. If you receive a regular paycheck from your employer that already has taxes deducted, then include the entire take-home amount. If you get paid weekly or biweekly, be sure to include all your pay for the entire month.

If you receive other sources of income such as child support or Social Security, include those as well. Only include income that you know for sure will be coming in each month, however. This will prevent surprise shortfalls that could destroy your budgeting efforts.

If you’re self-employed or have variable income that fluctuates from month to month, then review your prior income history and use your lowest earning months as your baseline. If necessary, be sure to set aside enough for taxes and don’t include that amount in your monthly income.

4. Calculate your monthly expenses.

Most people have relatively few sources of income to record, but expenses are a different story. You’ll likely have quite a few expenses to track. Examples of common expenses include bills, groceries, entertainment, and transportation costs. 

From the financial documents you gathered previously, review your banking and credit card statements from the last three months. Identify any debits and separate them into expense categories. Also be sure to include any cash receipts that you have as well.

Expenses typically fall into two larger categories of fixed and variable. Fixed expenses are those that cost the same each month while variable expenses may change. Fixed expenses include mortgage or rent payments, car loan and insurance payments, and other bills for services like tv, internet, and phone. These are just a few examples of course and will vary from person to person.

Variable expenses fluctuate monthly and can include things like groceries, entertainment, and gas. Use your average spending from the last three months to assign a value to each of these categories. This is where surprises may creep up since people often spend more than they realize.

5. Add up your monthly income and expenses.

If you have more income than expenses, congratulations! This means you have extra money to put toward savings or paying off debt. You should create an expense category labeled “savings” in your budget for these funds. This way all money coming in and out falls in it’s own assigned category. With this method, your income and expenses should balance out each month.

If your expenses are more than your income, then you’re overspending and will need to make some adjustments. The first expenses to look at are the variable expenses since these are often more flexible and can be reduced if necessary. You may choose to eat out less, for example. If your spending far exceeds your income, however, you will likely need to make more significant adjustments such as refinancing, downsizing, or finding additional sources of income. If a large percentage of your income is going toward debt, then consolidation or debt relief programs can also help.

6. Review and track expenses daily.

The real power of a budget is unleashed when you continue to monitor and track your spending over time. Recording expenses each day is preferable since they’ll be fresh on your mind. If necessary, weekly recordings should work as well, but definitely don’t wait until the end of the month.

Tracking your spending throughout the month will alert you to overspending and help identify unnecessary expenses. Identifying problematic spending early allows you make adjustments as you go and keep your monthly budget on track.

After creating your initial budget, you will have a clearer picture of your financial situation. You can then set spending goals for each category. Reviewing and tracking your expenses daily will help you meet those goals.



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