Many people hate the B word – budget. Likewise, you might associate budgeting with a restrictive spending plan that doesn’t allow room for fun. But budgets aren’t a bad thing. Quite the opposite, budgets are a way to gain control of your finances and track where your money goes.
If you’re ready to take control of your money, here are seven steps to creating a personal budget.
1. Identify your sources of income
The first step to creating a personal budget is writing down all sources of income. This can include funds you receive on a regular basis from your employer, alimony, child support, unemployment, disability etc. Make two columns on a sheet of paper or a spreadsheet. In one column, write down the source of income, and in the second column write down the amount of this income.
2. Identify your fixed expenses for the month
The next step is to identify your fixed expenses for the month. These are expenses that don’t change on a monthly basis and might include the following: rent/mortgage, utilities, auto loan payments, insurances, utilities and daycare expenses.
3. Subtract fixed expenses from income (take-home pay)
Take the total of fixed expenses and subtract this number from your take-home, which is income reflected on your paycheck after taxes and other payroll deductions, such as 401(k) contributions.
This calculation determines how much you have left for variable expenses.
4. Keep a record of receipts to assess how much you spend on variable expenses each month
Variable expenses include those that may change from month-to-month. These can include groceries, fuel, entertainment, recreation and miscellaneous expenses.
To determine how much you spend on variable expenses (on average), you’ll need to keep receipts and track your spending for a few weeks or a month. You can also look through your checkbook register or review credit card statements to estimate how much you spend on these expenses.
5. Contribute to your savings account
When establishing a personal budget, it’s important that you leave funds available for savings. Financial experts recommend creating a 3 to 6-month cash cushion for emergencies. To grow your bank account, aim to save a percentage of your money. After subtracting fixed expenses from your income, take 10% of the leftover amount and deposit this money into your savings account.
6. Determine a reasonable amount to spend on variable expenses
Based on how much you have left over after paying fixed expenses and contributing to your savings account, determine how much to spend on various spending categories. To illustrate, if you have $550 a month after fixed expenses and savings, you might create a breakdown such as:
- Groceries = $200 a month
- Transportation = $150 a month
- Recreation = $100 a month
- Miscellaneous expenses (shopping, gifts etc) = $100 a month
7. Make adjustments as needed
During the course of creating a personal budget, you may realize that your expenses -- more specifically, your fixed expenses -- exceed your income, which leaves little money in your budget for savings and variable expenses. If this happens, you’ll need to make adjustments to how you spend money. For example, you may have to downsize your house or purchase a cheaper automobile. Or perhaps work extra hours to generate additional income.
If you’re new to budgeting, there’s an adjustment period. However, as the days and months go by, budgeting becomes second nature. You’ll notice improvement in your personal finances, and you might have more money in the bank and find more opportunities to save.
Photo Credit: Balancing The Account By Hand, by Ken Teegardin via Flickr