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Did you ever think you’d catch yourself reading an article about how to create a budget? Hello, welcome to adulthood!
Whether you’re 65 or 18 years old, having a monthly budget is a vital piece in achieving your financial goals. Regardless if you’re just trying to stay afloat, get out of debt or start your own business, budgets are key to financial success. (Whether or not we like it.)
As much as budgets are loathed, they’re like that t-shirt that’s been with you for years. You know which one I’m talking about. That thing’s been used, abused, sneezed on, left on your bedroom floor and tossed in the trunk of your car. After all you put it through, it’s hanging on (perhaps by a thread) and it’s fit you just right (even when you gained a few pounds).
Budgets are like that. They’re flexible, adaptable, faithful and true. Budgets are the friends we never knew we needed.
But if you’re just starting out in creating a personal budget, it can be a little confusing where to start or what to do. Don’t worry, you’ve come to the right place.
What is a Budget?
To put it simply, a budget is just an estimate of income and expenses that are designated to various categories over designated amounts of time.
From the surface, it sounds simple, right? Yet when you go a bit deeper it can become overwhelming because there’s multiple ways a budget can be done – the indecisive part of me breaks out in an all out dance to usher in my anxiety.
So… Why Even Have a Budget?
Ultimately, a balanced budget allows you to manage your money, rather than letting your money manage you.
By knowing where every dollar (or penny) goes, you’re able to reach whatever your financial goals are in a clear and concise way.
Having a budget provides motivation.
When my husband whipped my financial butt into shape with a solid budget, I was able to see how close our get-out-of-debt goals were.
I was able to calculate when we could expect to be out of each tier of debt (i.e. credit cards, student loans, car loan) – and seeing how attainable those deadlines were put a fire in my belly to get myself together.
So, if you’re unorganized with your money, yet you desire to reach some pretty significant financial goals (e.g. getting out of debt, buying a house, etc.), then make a budget – it will help you get to where you’re wanting to go.
Having a budget empowers your spending.
Prior to having a budget, I would just spend. This kind of financial management would often leave me feeling pretty insecure.
Every time I handed off my debit card or entered my PIN number at check out, I silently hoped I had enough money in my account – at times I’d even rush and double check on my bank account app.
Often there’d be a credit purchase that hit that I hadn’t accounted for, which left me with less than I thought I had (or with the dreaded and unnecessary overdraft fees .$34? Seriously?) – can you relate?
Having a budget allows you to spend confidently.
Because you know where every dollar is going, you’re able to know exactly how much money you have for yourself. There’s no more second-guessing or triple checking last minute in the grocery line. *face palm*
So, though it’s technically a “budget,” start thinking of it more as a spending plan.
How to Create a Budget in 7 Super Simple Steps
1. Find a Budgeting Style That Works for You
There are several ways to budget, but they’re not a one-size-fits-all thing. You’ve really got to get to know each budgeting style to know how you want to handle your monthly budget.
Every person is different, and everybody has their own financial vices. So when you pick a budgeting method, be honest with yourself, what you’re capable of, and have a clear understanding of what your money goals are.
I personally think the best budgeting styles are:
- The Envelope System
- 60% Solution
- 50 20 30 Method
- Reverse Budgeting
- Zero Based Budgeting
- The No Budget Budget
- Values-Based Budget
- Create Your Own
To read more in-depth about each of these budgeting methods, CHECK OUT 8 Easy Budgeting Style That Will Get You Out of Debt.
2. Choose an Expense Tracker
Just think, back in the day, way before computers and phone apps, people had to budget with nothing more than a paper and pen. They didn’t even have a bank account statement to help them figure things out!
Talk about dedication!
Thankfully today we have so many different ways to manage our money. Ways that can automate the process and tools that can literally relieve us of the burden that can come with budgeting.
There are three main ways you can go to manage your budget — you can even use all three! #OverAchiever
I personally love to physically write out my budget breakdown. There’s just something about a paper and pen that get things drilled into my mind. How about you?
Today you can choose between using budgeting worksheet printouts, or using digital worksheets, like excel budgeting templates or google sheets.
I also like to utilize budgeting apps. These tools will save you time, save you headaches and some will legitimately do it all for you.
Whether you’re in need of hand-holding (getting constant reminders and updates on your spending) or you just want something to digitally plug the numbers into, budgeting apps are your friend.
If you’re not into using one-page worksheets or digital budgeting apps, consider using a budgeting planner. It’s literally like a checkbook on steroids.
Chances are, if you are into journaling, or using monthly/yearly planners to schedule your life, then you really will love using a budget planner.
I personally love my budget planner. There’s something about a planner that makes you feel important, and like you’re going places lol
CHECK OUT these super cheap and highly-rated budget planners on Amazon! (They’re all Prime, too #ChaChing #Free2DayShipping!)
3. Do Some Math: After-Tax Income
In order to start making your monthly budget you first need to know what kind of money you’re dealing with. Yes, your pre-tax check looks fantastic, but for some of us those nasty ol’ taxes have no mercy on our money.
So, how much are you actually bringing home?
After-tax income is the amount of money you actually have to spend once taxes are deducted from your pay. You’ll want to add up all of your streams of income, including your spouses income, side hustle income, and any passive income streams.
Also, if you get paid bi-weekly there are some months where you cash in three checks (#ShaBOOM!), but don’t calculate those into your equation. Base your budget on two paychecks per month — anything extra you can divy up as needed.
And just like that you figured out your after-tax income!
CHECK IT OUT: 101 Best Self-Employed/Side Hustle Ideas
4. Track Your Spending
Now that you know how much you’re rolling in each month post-taxes, you’re going to have to figure out how much you’re spending. Eek!
I remember when my husband and I created our budget for the first time. I took a one-two punch to the gut when I realized just how much I (and we) were spending on a monthly basis. How much money we’d honestly been wasting.
As easy as it is to get down on yourself for your past spending habits, keep your head up cause you’re on the road to recovery. That’s what matters.
How are you supposed to track your spending? Well, it’s really retracing your spending steps by looking back at your bank and credit accounts for at least two to four months time (try to make an educated guess with your cash spending habits). Finally, review all of your cards/debt sources and make note of how much each minimum payment is per month.
Now apply your expenses to whatever budget you have chosen for yourself from Step #1.
5. Establish Your Financial Goals and Priorities
So, I’m assuming you’re here because you have a reason to be. What was it that brought you here? What financial or life goal do you have in mind that you’re hoping to achieve? Keep that in mind.
As important as your financial goals are, you also want to set yourself up for emergencies. So, before you start making some real headway toward those goals, first focus on getting an established emergency fund.
Emergency funds are important because… well, because emergencies happen (and they’re never planned). So, in order to be prepared when tough times come, you want to have at least $1,000 saved (preferably in a high-interest savings account).
Get Rid of High Interest Debt
Believe it or not, there’s such thing as good debt. Unfortunately, common debt, like credit card debt, is not good to have.
Credit card interest rates can by up to 20+% and that is just ridiculous. That kind of a money-suck will make getting out of debt seem nearly impossible if you let it linger around. So, slay it once and for all.
Simply lay out all of your debts and decide which one you want to attack first.
My husband and I have chosen to get rid of our credit cards first, then we’re judo chopping our student loans (smallest first), then finally our car loan (our biggest debt). You may choose to attack your largest debt first, but if you need to see progress quickly to continue feeling motivated, I suggest you go for your smallest debt first and snowball it that way.
If you really want to get your retirement and 401k up and going, then focus on getting those in order, too.
For your 401k, whatever your employer will match, max it out! (Talk with you HR team to know what your employer will match).
For your retirement, open up an IRA account since they offer good tax benefits. To make this less of a headache for you, automate your retirement savings each month.
6. Monitor Your Progress
Probably one of the most vital steps to budgeting is this one — which is probably why so many throw in the towel.
What you want to do is review your budget as often as needed — ideally once a week. By establishing this habit you’ll be able to catch yourself when you’re off track (before you go too far off the rails) and keep yourself in-line.
Monitoring your budget also gives you time to remember your financial goals and get re-motivated.
When you finally pay off that card that’s been haunting you or you move that much closer to debt free it’s motivating! You get to see that your financial goals are possible (and perhaps discover other goals that might be a little too ambitious).
So, whatever you do, don’t skip this step. Keep with it, keep at it, and get it done.
7. Review and Adjust
As much as you might be hoping I’d tell you your work is done, it isn’t.
Budgeting isn’t something you do once and toss it to the side. It’s something you shmooze over the long-term.
Well, just think about it. Your debts today won’t be your debts tomorrow. Your goals today, once achieved, will be replaced by new ones. Perhaps you don’t own a home now, but next year you will. Your budget will need to be adjusted for that.
Budgeting — just like that ol’ faithful t-shirt — endures with you over the years, changing with you. If your desire is to master your money (rather than letting it master you), then have a long-term perspective on budgeting.
Now that you know how to create a budget, be flexible with yourself. Try things out, ditch whatever isn’t working, and implement new strategies to boost your results. Whether you use budget spreadsheets, expense trackers, budget planners or budgeting apps, take advantage of the tools accessible to you.
If you want to get out of debt, you can. If you want to purchase a home to give your family space and stability, you can. Make a plan and stick with it — even when you stumble along the way. Sooner or later you’ll get to where you’re going.