How to Create a Budget
Creating a budget and sticking to it is critical to helping you reach your financial goals. Without a budget, you could be described as a loose cannon ready to spend money at the sound of the word “sale”. Creating a budget is not easy though. It takes time to refine it in a way that keeps you motivated while simultaneously helps you to save money. In this post, we’ll teach you how to create a budget with tips to keep you motivated and on track!
The goal of budgeting
A budget is defined as “an estimate of income and expenditure for a set period of time”. This means you’ll need to determine your income and expenses for a set period of time, usually monthly. When it comes to budgeting, your goal is to set limits for yourself in order to save money and reach your financial goals. You want to balance your income against your expenses and savings leaving you with $0 at the end of each month.
Creating your budget
Now that you understand the goal of budgeting, it’s time to start doing it. If you have a spouse, you’ll need them to be involved as well so that they can have input and you can reach your financial goals together.
Step 1: Create a list of all income streams
Your first step in creating a budget is to determine your monthly income from all income streams. If you have one income stream, this might be pretty simple. It’s important to count each income stream, including interest on savings accounts. While it might only be $10 each month, this money will add up and needs to be allocated appropriately.
If your income changes from month to month, it’s a good idea to average your income across the entire year and save accordingly. For example, if you make $6,000 a month for 5 months per year, but only $2,000 a month for 7 months, you’ll need to pad your savings during the 5 months in order to cover the expenses for months where your income may not be enough.
Step 2: Create a list of your expenses for the past 4 months
The second thing you need to do when creating a budget is to find out what exactly you spend your money on. Go back through the previous 4 months of expenses to find this out. Go through each credit or debit card and write down each transaction. Then categorize the transactions into different groups such as meals and entertainment, utilities, fuels, and housing. This is the hardest and most time-consuming step of creating a budget but it is also the most important. Here is a list of common budget categories:
- Car Payment
- Meals & Entertainment
- Gym Membership
- Reoccurring Subscriptions
There are some apps that can help you do this to save some time. We like Mint as it lets you log in to many of your accounts online and it will categorize the transactions for you. In addition, it will even help you create a budget. You can download Mint here.
Step 3: Determine what you should be spending by category
After you’ve categorized all of your transactions, you’ll need to determine how much you should be spending for each. For example, if in the past 4 months you’ve typically spent $400 on meals and entertainment, maybe you determine that $300 is more reasonable while still doable for you. Write that number down. The goal here is to decrease the amount below what you had been spending in the previous months. That way you can allocate this money elsewhere, where it will provide more value for you. The goal of budgeting is to have $0 leftover. All of your money should be allocated to each of the categories.
Step 4: Finalize your budget
Once you’ve determined how much you want to spend for each category, your budget is essentially finished. You should make any last-minute tweaks before starting and review them with your spouse. Be sure that you have no money left over at the end of each month and if you do, allocate that money to savings or paying off debt.
Step 5: Start budgeting
Once you’ve finalized your budget, it’s time to actually start budgeting. Limit yourself to the amounts that you determined for your budget and watch your savings grow.
It’s important to keep track of your spending as you go. Because you only allow yourself specific amounts for each category, you’ll need to know how much you have left at any given moment. For example, if you set a grocery budget for $200 per month, and you go to the grocery at the end of the month and don’t know how much you have left, chances are you will end up overspending. You can keep track of your spending on paper or through various budgeting apps, like Mint or YouNeedABudget.
How to stay on track
After you’ve been budgeting for a month or so, it can be slightly more difficult to stay motivated. We’ve put together some tips to help you stay motivated on your budget for the months and years to come.
Remember why you started
Did you start budgeting to pay off that pesky student loan? Or did you start budgeting to save for a family vacation? Whatever your reason is, remembering why you started can help you to stay motivated. Imagining the feeling when your student loan is paid off can help keep you going in the right direction.
Remember where you started
Now think of specific numbers. Did you have $47,274 of student debt when you started? Think of that number every time you make a financial decision. Watching it get lower and lower will help to keep you chipping away and reach your goals faster.
Don’t overstress yourself
When it comes to budgeting, many people will stress it to themselves too much, leaving them with no room for errors. Putting this kind of stress on yourself, when you’re already presumably stressed financially, is not sustainable. You need to give yourself a break sometimes to keep your motivation high.
Give yourself room for error
Similar to the tip above, not giving yourself any room for error can cause you to give up quicker. You will make a mistake at some point in your journey. Forget these days. If you overspend by $50 one month on entertainment, skip over it. Just be sure that the trend does not continue.
What to do if I mess up my budget?
If you mess up on your budget and splurge on an unnecessary item, don’t give up. It’s bound to happen, so this is your chance to keep going and learning from your mistakes. If your mistake was not budgeting a monthly expense, you should go back and re-budget your monthly expenses so that your income, expenses, and savings are balanced.
Staying on your financial grind can help you to overcome any obstacles you may face and will help you reach your goals. By strategically spending your hard-earned money on specific categories, you’ll begin to notice trends that can be interpreted and adjusted based on your needs and goals. Consistency is key when it comes to budgeting. Keep yourself on track, and if you happen to stray slightly, always remember why and where you started to guide yourself back and keep progressing toward your goals.