How to build a budget
Setting a budget is more than just a spreadsheet. It is a commitment or contract you make with yourself to only spend what you need to when you need to. It’s also a promise to yourself to optimize that budget to make it work for you, to provide you with the ability to do the things you want to do and the peace of mind to enjoy it. There are many budgeting apps out there that can automate some of this, as well as online banking tools utilized; however, the algorithms don’t always catch every bill correctly or help you keep down your discretionary spending. Our first and best tip is to get out a piece of paper or open a spreadsheet and do the manual work. You can then add your budget into those apps to help you stay on track.
There are different ways to build a budget, but below is our budgeting checklist:
- Put together all your sources of income.This may include your main salary or wages, self-employment income, spousal support, dividends, government aide, and even bonuses. Categorize your income into income you can regularly depend on monthly (“fixed”), income that is fixed but occurs on another schedule other than monthly, and income that is not guaranteed or that varies in amount. Any income that is not guaranteed typically should not be relied upon for your regular expenses. We talk later about how to treat this income. The goal for this step is to know exactly when you will be paid throughout the month and year. If you are a visual person, you can even create a calendar so you can see when your money is expected.
- After you have a clear picture of your income, it’s time to turn to your fixed expenses. These are expenses that do not normally change from month to month or that stay within an expected range but always occur on the same schedule. These fixed expenses include things like your rent or mortgage, car payments, consumer debt or student loan payments, utilities and media services. It can even include subscriptions or membership fees. If it is a regular and expected expense, it goes here. Once you have your list, add in payment dates. Next, categorize these expenses into necessary or essential (think utilities and rent) and discretionary (those expenses you can live without). This doesn’t mean you have to cut out discretionary spending (at least not yet), but at least you have a clear picture of what you have to spend and what you choose to spend.
- Next, and much harder to pin down, is to figure out your variable spending. This would include spending on things such as entertainment, groceries, eating out, travel, clothing, etc. By pulling your financial records you should have an idea of what you are spending each month and where.
- Now it’s time to think about your saving habits.Are you saving enough and regularly? And where is this money going? In order to add savings to your budget, you need to know how much you need and want to be saving. That amount can vary by your savings goals, but in general, most individuals should be saving between 10%-30% of their income each month. Now let’s talk about how to do that because ultimately, budgeting is not about spending, it’s about freeing up money to save.
Once you have figured out the information listed above, the next step will be to do the math. We will share those steps with you later. Be sure you are following us on social media so you can get the update.