Budgeting 101: How to Create a Budget

Keeping a budget can seem daunting or restrictive at first, especially if you’ve never had one before. But a budget can offer you peace of mind and give you more confidence in managing your finances. Rather than worrying about money, you’ll know exactly what you and your cash flow are up to. With that knowledge, you can better decide what you spend and what you save. You don’t need to have the perfect budget right away. A basic budget is all you need to take charge of your finances—and help achieve more of your financial goals.

Creating a basic budget is a huge financial victory. It helps you ensure you can cover your expenses and reach for exciting milestones, like buying a house or paying off your student loans. As you continue to budget, make adjustments as you see fit. Your income, expenses or lifestyle might change, and it’s important to ensure your budget keeps working for you and your future.

What is a Budget?

A budget is a financial outline for your income and expenditures for a certain period of time, such as one month. With a budget, you can track the amount you’re making compared to what you’re spending and saving. You can maintain a budget with a spreadsheet, paper and pen or through a online tool or budgeting app like Mint.com.

How to Create a Budget?

To set up your budget, you’ll need a few key pieces of information. With these basic components, you’ll have a foundation for your budget that you can tweak as the months go by and as financial circumstances change.

Calculate your monthly income after taxes

Total up what you typically make in a month, minus taxes. Estimate or find an average for any commissions, bonuses, or tips you receive. Your monthly income lays the groundwork for your entire budget. It helps you realize how much money you have to spend, save, and pay off debts.

Account for your living expenses

Your living expenses like rent payment, utility bills, groceries, transportation, and health care costs are likely to absorb a large chunk of your budget. Create a list of each of these regular expenditures. Calculate a monthly estimate for each one, so you know how much of your income is dedicated to it. If you’re not sure how much something costs, review previous bills and credit card statements to see what you’ve spent in the past.

Consider the debts that you have

If you have student loans and credit card balances, you’ll want to attribute part of your monthly budget to paying them off. Allocate a certain amount to these monthly payments. The sooner you pay off debts, the less interest you’ll pay overall.

Factor in miscellaneous items

Whether you belong to a gym, go on a weekly date, or have a Netflix subscription, make sure you account for these costs in your budget. Reviewing these expenses can help determine if you want to keep paying for them, or cut back.

Set goals to help you stay on track

If you want to stow away funds for retirement, save for a new car, or pay down any of your debt, it’s helpful to establish concrete goals, then break them down into bite-size chunks. For example, if you want to take a $1,200 vacation next year to New York, you’ll need to stow away an extra $100 every month. Put that dollar amount into your budget. When you write out a clear plan, you’re much more likely to follow through with it.

Common Budgeting Obstacles and Mistakes

Like most things in life, budgeting isn’t always clear-cut. There can be aspects that are difficult or ambiguous. Luckily, there are some ways to ensure you have the most accurate budget—no matter the circumstance.

Estimating irregular income

If you’re a freelancer or work a side hustle, you likely have an irregular income that can be hard to predict. In these cases, it’s best to estimate a conservative (low) amount, so you don’t overspend. Review the past 3-6 months of income and watch for any patterns. Can you find an approximate hourly rate or weekly rate for what you bring in? If you’re new to a job, ask a coworker how much they typically make in extra pay like tips or bonuses. Above all, do your best to create an income estimate—knowing you can tweak it along the way.

Paying for emergency expenses

Unfortunately, accidents and unexpected bills happen to everyone. From car troubles to job loss and medical expenses, emergencies can be expensive. An unexpected bill can throw off our budget, and set you back. Do your best to factor the expense into your budget while paying your other bills. For instance, you may want to cut back on eating out for the month, or pick up an extra shift to cover a bill. If you can, build an emergency fund into your budget to safeguard your finances against future unexpected situations.

Forgetting one-time expenses

Items like annual memberships, vacations, and gifts for family and friends are often forgotten when creating a budget. If you can, set aside a small amount of cash every month for these extra expenses. You can estimate the expected cost for the year and account for them in your monthly budget. For example, if you typically spend $300 on Christmas gifts, set aside an extra $25 every month. By the time December comes, you’ll have the cash available to spend on gifts.

Tips for Expense Tracking

Keeping a tab on what you spend helps you see exactly where your money is going. It allows you to make adjustments to your saving and spending habits. There are a few ways to make the monthly tracking easier.

Consider a zero-based budget

With the zero-based budget technique, each month begins and ends with zero dollars. Every dollar has a purpose. For example, if you make $3,500 every month, attribute each dollar to an expense. You might put $1,750 toward living expenses, $700 toward paying off debt, and $1,050 toward personal expenses like going to the movies or saving for vacation. At the end of the month, your balance is zero, because every dollar is accounted for.

Try the envelope method

The envelope system involves spending with cash instead of plastic. If you budget $100 for eating at restaurants, put that amount into an envelope. When the money’s gone, you have to wait until next month to eat out again. If you budget $200 for groceries, put $200 in a “grocery” envelope. If you’re at the checkout line and the total comes to $203, you’ll need to put something back. The envelope method helps you be more strict with your budget. The pockets of cash are a visual and tangible reminder of how much money you’re dedicating to each area of your life.

Sources: Mint.com