Budgeting does not have to be painful! I went from knowing nothing about budgeting to using a monthly and yearly budget that I update regularly (and I am a spender!).
A quick note — the steps below will help you learn how to create a budget manually. You can also sign up for a digital service (I use Personal Capital) if you want to see all your stuff electronically (I am visual, so the charts and graphs are super helpful for me).
But either way you choose to budget, whether handwritten, in excel, or by an online tool, you should understand what budgeting is all about. Here are six steps to help you get started.
6 STEPS TO BUDGETING
Step 1: Calculate your monthly income
Begin budgeting by calculating your income. List all of your income in your budgeting tool (whether that’s at the top of a page or in an excel spreadsheet. Your income is what you’ll subtract your expenses from.
For a lot of people this is their salary. But if you are a business owner (or a blogger) or if you have additional income from a side hustle, you will want to include all of your income on your budget. Try your best to estimate what your monthly income will be for this month. If your income is inconsistent, take the average of the last three months income and use that as your income.
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I include my tax information on my budget because I like to know what I’m paying, but you don’t have to. You can just fill in your take home pay if you prefer. Use a paystub so you can get as close to accurate information as possible. And remember to include any additional income aside from your salary, if applicable. If this feels tedious, it’s because it is. But it’s worth it! You’ll be so thankful you planned ahead for the month.
Step 2: Add up your fixed monthly expenses
Enter all of your monthly expenses into your budget. Enter your fixed (non-discretionary) expenses. Your non-discretionary expenses are expenses that you have to pay, such as your rent/mortgage, gas, water bill, groceries, car payment, and student loans (think monthly bills and living expenses). You’ll want to include debts in your non-discretionary expenses, too.
If you’re not sure what your expenses are since you haven’t budgeted before, go into your accounts online from the past 1-3 months and use the average number. Depending on how messy your finances are, this task may seem daunting. But it’s really important to use as close to exact numbers as you can because it’ll make your budget as accurate as possible.
Step 3: Set financial goals
Write out your financial goals. If you haven’t written out goals before, a good place to start is by looking at the vision you have for your financial life. Do you want to be financially successful? Do you want to have wealth? Do you want to be debt free? Think about what you want in the ideal and think about where you are right now. Then, determine your personal financial goals that you want to set for the short-term (i.e. under a year) that you’ll include in your monthly budget.
Examples of financial goals:
– Get out of debt
– Build a 3-6 month emergency fund
– Fully fund a retirement account
– Save for a down payment on a house
After you’ve written out your financial goals, begin to think about them as “expenses” and enter them into your budget. By thinking of your financial goals as expenses, you’ll pay them monthly. This will get you in the habit of saving for your financial goals, which is necessary for success.
- Related: How to set goals for beginners
Step 4: Determine your discretionary expenses
After you’ve accounted for your non-discretionary expenses and your financial goals, enter your discretionary expenses.
Your discretionary expenses are expenses that you currently pay for, but that are not essential. Examples of non-discretionary expenses include entertainment, dining out, gifts, vacations, personal care, and clothes. These are costs that can be adjusted based on what you can afford. Notice that they come after your fixed expenses and financial goals. It’s important to prioritize your financial health over unnecessary things, such as entertainment and vacations.
Step 5: Subtract your income from expenses
Subtract your expenses from your take home pay to determine your monthly cash flow (cash flow is a finance term that looks at your money coming in against your money going out).
If you get a positive number, this means you make more money than you spend (woohoo). Now, you can go back to your budget and adjust your numbers if you need to. For example, maybe you have a surplus of several hundred dollars. You could put more into savings or put more toward your debt pay off. You want to give every dollar a mission in your budget, so you’re completely planning out what each and every dollar is for.
If you break even, this means you have exactly enough money, but no margin. You may want to adjust your budget to give yourself some margin in the form of a “discretionary” category in the event that things come up that you didn’t plan for.
If you get a negative number, this means you’re spending more money than you take home (not good). If your number is negative, adjust your budget by decreasing some of your discretionary expenses or find a way to increase your income. A way to decrease your discretionary expenses is to spend less on entertainment, dining out, or other non-essential things. Make sure your financial goals are being met before spending on discretionary items. For example, it’s an unwise financial choice to go on a vacation if you don’t have an emergency fund.
Whatever your number, there is power in knowing. It’s the first step toward planning your financial future.
Step 6: Implement, monitor, and adjust your budget
Now that you’ve created your budget, the last step is simply to implement, monitor, and adjust your budget. The first couple of months of budgeting are rough. Don’t get discouraged. Know that I am personally rooting for you! It takes a bit of time to adjust to budgeting. Budgeting on paper and then sticking to it during the month isn’t always easy. Keep going anyways. It gets easier as time goes on because you begin to think about money differently. You adjust to the system and do better as time passes.
- Related: The Ultimate Guide to Frugal Living
Part of your improvement and progress comes from regularly monitoring your budget. Do this by having a set time where you fill in your budget. I do mine weekly, which works because it’s often enough that I check in and re-tabulate how it’s going, but not too often that it becomes a daily task. I set aside an hour Saturday morning to look at my accounts and make any changes to my budget. This is a great time to go over your budget if you’re doing it with a significant other, as well. The important point is to check in regularly. This will help you implement your plan and stay on track.
As you monitor your budget, reflect on the process, and make changes as needed, keep going and let your budget be the system that helps you achieve financial success.
A Final Note!
Budgeting can feel restrictive, but I believe it can help you achieve the financial freedom you want. It’s the reason for my financial success. Budgeting helps me stay on track.
Like I said above, I use Personal Capital to budget online — it keeps my money organized electronically. If you are a manual budgeter, use the steps above to get started.
Regardless of your financial situation — get on a budget now, so you can live the life you’ve always wanted later. 🙂