Creating your first budget might seem overwhelming at first, but it's actually pretty straightforward. It's also one of the best things you can do for your financial future. Learn how to create your first budget step by step.
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Creating a budget is one of the best things you can do to get your financial life in order.
But the idea of setting up and sticking to a budget sounds boring and painful to a lot of people. It’s really not like that, though.
The purpose of a budget is not to eliminate fun or torture yourself. Budgeting is about making smart choices, not horrible sacrifices.
A budget is just a spending plan for your money. Your plan helps you avoid problems and reach your goals. That’s why budgeting is important to your financial health.
Create your first budget and you have a road map for spending your money rather than winging it then wondering where it all went at the end of the month.
When you make a budget, you’ll know where your money goes. You’ll identify areas where you can reduce your spending. Budgeting also makes it easier to achieve financial goals like paying down debt or building an emergency fund.
Starting a budget might seem like an overwhelming task, but it’s not that hard. Most of your work is done once you get through the initial setup. To maintain it, you just need to log your income and expenses then make little tweaks here and there as needed.
There are plenty of websites and apps you can use to budget your money like Mint and You Need a Budget, but you can also use a spreadsheet or pen and paper. It doesn’t matter as long as you get started.
Here we go:
The first step in creating a budget is to determine how much money you take home each month. Your budget starts with your spendable income, which is the amount of money you receive after taxes and any other deductions.
If you get a regular salary from your employer, your monthly net income is easy to figure out. Add up your paychecks for one month. That’s your starting point.
If you freelance, are self-employed, or your income varies from month to month because of varying hours, overtime, or commissions, start with your average gross income for the past year. Make sure you account for state and federal taxes if they’re not taken out.
Once you have a handle on your income, it’s time to think about where you spend your money. There are three types of expenses in a budget you need to account for: fixed expenses that don’t change like rent, periodic that aren’t paid monthly like your Costco membership, and variable, which you can control with your spending habits.
You’ll break down your expenses into categories.
Common expense categories include:
Some of these expenses like rent or car payments will be fixed, meaning the same every month. Others will be variable and fluctuate every month.
You can fill in your fixed expenses in the appropriate categories right away.
For variable expenses like utilities or groceries, you’ll want to average them out over the last few months then use that number for your budgeted amount.
To determine how much to budget for groceries, you could add up all of your grocery spending during the past three months then divide by three.
For something like utilities, where you might spend more or less depending on the season, you’ll want to go back through your spending for a longer period. For instance, if your electric bill is $150 in February, but only $40 dollars in June it wouldn’t be smart to allocate $40 for electricity every month.
Round up your variable expenses where you can. Suppose your average grocery spend comes out to $328. Round your spending limit up to $350 to give yourself some wiggle room.
The last step in creating a budget is subtracting your expenses from your income. Hopefully, your net income exceeds your expenses. If not, make adjustments.
For example, if after logging everything your expenses are $200 more than your monthly income, you must cut at least that amount from your budget.
Examine your variable expenses when trying to trim your budget.
Some things might jump off the page at you, especially since this is your first budget and you probably haven’t tracked your spending that closely. You might find that you spend $200 a month on lunches out and fast food after work when you don’t feel like cooking.
If nothing stands out, you can evaluate how much you spend on groceries, entertainment, and any other flexible costs then look for ways to cut down.
If you have money left over after totaling your expenses, it would be wise to give every dollar a job and budget down to zero. To do that, add the surplus to one or more of your budget categories until your income minus your expenses equals zero.
If you don’t have an emergency fund, start one with your leftover cash. You could also use the excess toward one of your financial goals, like paying down debt or saving for a specific goal.
You did it! All the numbers were run. You’ve started a budget.
The next step is sticking to your budget.
Creating a budget is a huge first step toward reaching your long-term financial goals. Sticking to your budget is more important.
Track your expenses daily or every time you spend money. Don’t just do it once a month.
You’ll see your spending habits and patterns. You’ll also be able to tell if you need to adjust the amounts you’ve allocated for your variable expenses or if you need to find ways to decrease your spending.
Tape a copy some place you’ll see it before you go out. Review it before you go shopping or out with friends so you know what you can spend.
You also might want to try a budgeting technique called the envelope method which will help you stick to your plan. The envelope method works like this:
You don’t have to make an envelope for every expense category or pay all your bills in cash. If you tend to overspend, the envelope system will help you stay on track. Try it with expenses you might go overboard with, like entertainment, clothing, or dining.
After you complete the steps and create your first budget, you can spend without guilt. You can breathe easier knowing that your financial situation is getting better every day.
There will be challenges, though. That’s OK. Your budget is subject to change.
Try your budget for a few months. If it’s not quite working, make adjustments as often as you need to. Eventually, you’ll arrive at a budget that suits you.
If you fall off the wagon, know that overspending doesn’t make you a failure. It doesn’t mean that you’re going to be homeless and penniless. Forgive yourself, make an adjustment if necessary, and move on.
If after living on a budget for a while, you get sick of it and feel a case of budget burnout or frugal fatigue setting in, remember why you’re doing this. You’re saving money and paving the way for a bright financial future.
It takes some work up front, some adapting, and some adjusting along the way, but the results will be worth the effort.
Hi I'm Sara! My husband Jerry and I are on a mission to earn more, spend less, get out of debt, retire early, and enjoy life. We want to help you do the same. Learn more →