How To Create a Budget In 7 Steps
Before we get started, I want to get a few things straight:
A budget is not an instrument of Satan designed to steal, kill, and rob you of joy.
Please repeat after me. You can have a life, a fun one, and still have a budget.
A budget is nothing more than a plan to help you financially manage your life. You control your budget, but it must fit your income and lifestyle.
.Hopefully, you now see a budget as a plan to support your lifestyle, you decide what to budget.
To create a budget, do the following:
Pick an online budgeting tool
Figure out your total income
Review your monthly expenses
Create budget categories based on your monthly expenses
Use your online tools to create your budget categories and fill in your budget
Track your spending for 30 days
After a month, review your spending vs. the amount budgeted
1. Pick an online budgeting tool
The best budgeting tool should be simple and easy for you to use without making you reach for a bottle of aspirin. It's the tool that makes budgeting easy for YOU:
If you thrive on details, consider spreadsheets or programs like Tiller Money.
If you like "physical boundaries" around your spending, consider setting up bank accounts for your broad spending categories. Talaat and Tai, with "His and Her Money," explain how they use bank accounts to budget.
If you like using technology, budgeting apps like YNAB or Everyday Dollar can help you track your spending. I love YNAB's (You Need a Budget) simple concept of budgeting the money you have.
If you want to kick it old school, get a notebook and write your budget.
2. Calculate total household take-home income
Review your household's pay stubs for the last month and add them up.
If pay varies, review the last three months and divide by 3 to get an average.
Don't overthink. The goal is to start the budget, so pick a number and next month. Right now, we're looking for a starting point.
3. Review your prior months’ expenses
If you choose an online tool that connects to your account, that tool may automatically create a budget based on past spending.
If not, either use your bank's software to review a month's of expenses (use the last full month) or print your last statement
4. Organize your expenses in categories
If you chose an online tool that creates categories for you, review your transactions to make sure the tool correctly categorized your transactions.
Below are ideas on how to categorize your budget. The goal is to get detailed enough to make you aware of your spending.
MONTHLY BILLS
Helpful tip: organize your expenses by due dates to help you easily keep track of upcoming expenses.
Giving (tithing, family, charities, etc)
Housing-Related (mortgage/rent, utilities, lawn care, etc.)
Transportation-Related (car payments, insurance, etc.)
Other monthly Reoccuring Bills (cable/satellite, childcare, kid's activities, cellphone, memberships, etc.)
NON-BILL MONTHLY EXPENSES
Helpful tip: It's OK to estimate if you're not sure
Groceries
Auto Gas
Eating out
Entertainment (movies, concerts, amusement parks
Personal spending money
Kids (clothing, allowance, grooming, etc)
Pets (dog food, pet daycare, etc, typically monthly expenses for your pet)
HEALTH-RELATED EXPENSES
Medical, Dental, Vision Premiums (don't list if deducted from paycheck)
Prescriptions
Other medical provider costs
Life Insurance (don't list the amount deducted from paycheck)
Disability (again, don't list if the amount is deducted from your paycheck)
THINGS YOU TYPICALLY SPEND MONEY ON THROUGHOUT THE YEAR
Helpful tip: Estimate how much you spend annually in each category and divide by 12 to get an idea of how much you should consider setting aside monthly to cover the costs. If you're unsure, look at your bank's online banking tools to help you sort through expenses.
Car Related (repairs, maintenance, registration, tags, etc)
Home Related (repairs, maintenance, etc)
Travel
Gifts
Birthday (nongift birthday expenses like parties)
Kids (dance costumes, uniforms, sports equipment, testing fees, etc)
Pet care (grooming, boarding, heartworms, vaccinations)
Education/Training not paid by the employer
Professional Licenses/Certification renewals
Other future purchases (furniture, appliances, etc0
Down payment for a home
Future car
SAVINGS
Emergency Savings ( Think, the "You've got to be kidding me" stuff)
College Savings
Investments
Other Savings
NON-PROPERTY DEBT
Credit cards
Student loans
Other obligations (payment to IRS, local government, family, etc)
5. Use your online budget tool to create a budget
If you used a tool that allowed you to connect your accounts, the budget should pop up automatically.
If you manually enter the information, add your income and the expense categories you wish to track using the prior month’s expenses.
The goal is for every dollar to have a category. This is sometimes called Zero Based Budgeting.
Consider creating and adding a few dollars to a category called “buffer.” this amount can be used for expenses you may have forgotten about
Note For YNAB Users: YNAB is designed for you to only budget the money you have.
So this means doing things a tad differently.
Create three main sections. When you first set up YNAB, you'll see the main sections as Immediate Obligations, True Expenses, Debt Payments, Quality of Life Goals, and Credit Card if you add a credit card. You change and move the main sections around to the following:
Reoccurring Monthly Bill (this section is for bills with the same amount owed monthly)
Variable ( for expenses like groceries, gas, and eating out that you spend monthly, but the dollar amounts change)
Savings ( For any type of savings)
YNAB Tip: Under the main sections, create your categories skip a space,, and add the due date and the amount of the monthly bill.
This will keep upcoming bills top of mind as you budget during the month. If it's not too overwhelming, do a target amount for each bill. For instance, if you have a $200 cell phone bill due on the 10th, then your target is to have $200 available by the 8th.
I suggest for your first budget, consider entering everything in manually to keep it simple.
I strongly encourage you to review YNAB videos to help you get started setting up your budget.
6. Track your spending for 30 days
Your goal for the month is NOT to have an accurate budget. That only happens with time, so expect mistakes and surprises. The goal is for you to do a budget and consistently track your spending during the month by doing the following:
Commit to logging in EVERY expense for 30 days.
Schedule time to review your spending and review upcoming spending needs
Give yourself grace. Confession: the first budget I did, I forgot childcare. This means our first budget was off by over $300. It was a mess, but we got better at it, and you will too.
The #1 goal is consistency. Mistakes will happen, and that's OK. Success is consistently tracking your expenses.
7. After 30 days, review your spending vs the amount budgeted for:
Area of overspending
Expenses you may need to include in your budget
Adjustments you may need to make
Subscriptions to possibly cancel
Once done, use those updates to create the next months budget. Rinse and repeat. It takes about three months of consistently budgeting to get a handle on your budget.
After one full year of seasonal expenses, you will get better at budgeting and become a budgeting ninja before you know it!
Next Steps
To recap, below are the 7 Steps To Create Your Budget:
Pick an online budgeting tool
Calculate total household take-home pay
Review a month of expenses
Organize your expenses into categories
Use your online budgeting tool to create your budget
Track your spending for 30 days
After 30 days, review your spending vs. the amount budgeted
Don't get overwhelmed. Start simple. Here's a suggestion to help you get started:
Monday: Pick what online tool you will use. Do a free trial if unsure.
Tuesday: Figure out the monthly income you want to use to budget.
Wednesday: Review your most common expenses on your statements.
Thursday: Create budget categories based on your monthly expenses.
Friday or Saturday: Use your online budget tool to create your budget.
Following Monday: Start using your budget.
Rome wasn't built in a day, and neither will your budget. The longer you budget, the more accurate your budget will get. It's about consistency, not perfection.
