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How to Create a Budget

Creating a budget is probably the first thing you do when getting your finances in order. Your budget is your outline and your playbook. It lays out exactly what you earn and where all of your money goes.

Unfortunately, there aren’t nearly enough people who use a budget to help organize their finances. For some people, they don’t want to limit their spending, but for others, they don’t have the tools or the knowledge of how to start.

In this post, I will describe what it takes to create a solid budget.

Figure out how much you make

The first thing you should do is figure out how much money you take home. This is what’s left after taxes, insurance (if it is offered at your company), and retirement savings (see insurance). How much you make will come in handy after the next step.

How much do you spend?

Now you need to track your spending. Figure out exactly how much you spend every month and where it’s going. By doing this you can determine where you are spending too much and make adjustments accordingly.

I use Monefy to track my spending. You are able to break it down into categories so you know, in a snapshot, exactly what is being spent and where.

Compare income versus spending

Are you spending more than you make? Time to trim some spending. Maybe you spent less than you made, congratulations! However, you can also trim spending in order to save even more.

How much do you want to spend?

This is what I did.

I wrote down my take-home pay. Then I wrote down all of my bills. This included mortgage, car payment, utilities, and debts. After that, I wrote down a realistic, but a low number for groceries and household items. The only thing left is fun money, which I deliberately kept low in order to save more.

Well Kept Wallet did an article on what the average household spends. See how your spending compares.

Because my spending primarily consists of necessary expenses (bills, groceries, etc.), I am able to save the rest of my income. I recommend always saving first and then spend what is left over.

How much for saving?

The amount of money you save will have a large impact on your future. It will affect how you financially respond to an emergency, whether or not you reach a short-term goal, and when/if you retire.

Make sure you’re setting aside money each month for emergencies. Three to six months’ worth of living expenses is normally recommended.

Set money aside for short-term goals. A down payment for a house, for example, is a great goal to save for.

You also need to deliberately save money for retirement. You should be saving at least 15% of your income for retirement, but more is always better if you are able to.

Write it down

Type it up in a spreadsheet or write down on paper, either way, you need to have a written plan.

You should also revisit your budget every month. You can continue to track your spending and find other areas where you can limit that spending.

Your goals can also change, which will give you something new to save for, therefore, some increased savings may be necessary.

Conclusion

Creating a budget is a very important step when getting your finances in order. Use these tips to get you started. Track and trim your spending. Be deliberate with your savings. And save before you spend.

So readers, what budget items do you have trouble with?