According to one survey, 27% of Americans think they don’t need a budget. There are many reasons for this — most commonly because they don’t believe it’s necessary — but one thing never changes: a budget is a must-have.
If you are new to creating a budget, don’t worry. This six-step guide will cover everything you need to know. Let’s dive into how to make a budget.
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What is a budget?
A budget is a spending plan specific to your financial situation. It is determined based on your income and expenses.
Typically, creating a budget consists of outlining how much money you have coming in, where the funds need to be allocated, and where you need to adjust to save and invest money.
A clear personal budget helps you organize your money, track your spending, plan for the future, and achieve your financial goals.
Why should you budget?
Raise your hand if you’re tired of living paycheck-to-paycheck. Turns out, the age-old wisdom is true – it all comes down to budgeting!
Whether your goal is stumbling toward financial freedom or living that YOLO life without going broke, here are all the reasons budgeting deserves a permanent spot in your money routine.
1. Save for an emergency fund
An emergency fund is a critical component of financial well-being. It lets you cover urgent expenses that you cannot wait for, such as auto repairs and medical bills. Many consumers are vulnerable to surprise expenses. More than half, or 58%, of all Americans are now living paycheck to paycheck, according to the CNBC Your Money Financial Confidence Survey. Some people take out loans to cover emergency expenses, resulting in extra debt and monthly payments. Building an emergency fund with good budgeting strategies can help you stay on top of your monthly expenses and also ensure that you cover unexpected emergency expenses.
2. Pay off your debt
Getting out of debt is key to minimizing expenses and building wealth. If you’re only making the minimum payments, you can end up in debt longer and pay more interest. An effective budget can help you exceed the minimum payment for your credit card debt.
If you create a budget, you may also have an easier time covering student loans, car payments, and insurance premiums.
3. Add money to your retirement accounts
Retirement accounts allow you to help grow your money and lower your tax bill. Some retirement accounts let you save taxes on contributions, while others let you save on withdrawals.
Regardless of your choice, it’s essential to contribute to retirement accounts. An effective budget can enable you to make the maximum contribution towards your retirement funds and help ensure you’re taken care of in the future.
4. Grow your savings
When you reduce your expenses with a budget, you can allocate the extra money according to your priorities. Paying off debt will slow interest compounding, but you can put more money into your savings once you pay off debt. Building up your cash reserves can help you save for large expenses or strengthen your financial security.
5. Have money to play
Budgeting doesn’t mean you can’t have fun. In fact, by setting a budget you’re essentially giving yourself room to spend money on things you enjoy! Going out to eat, shopping, fun, travel, and more!
The difference is that, by sticking to a budget, you can enjoy life AND ensure you’re sticking to your financial goals at the same time. Healthy financial habits breed a happy life. Talk about a win-win!
How to make a budget in 6 steps
A budget helps you get more out of your money. It allows you to become more intentional about spending money and can assist with long-term financial goals.
Best part? It’s easier than you think! Follow this six-step process to create a budget in a breeze.
1. Choose your budgeting strategy
Everyone’s financial goals are different. They often depend on income, investment strategies, and lifestyle. Choose a strategy that helps you meet your goals while allowing you to focus on what matters to you the most.
While there are several budgeting strategies, these are some of the most popular choices for mastering your finances.
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Cash envelope system: This is ideal for people who want to be cautious with their spending habits. In this system, you will designate envelopes for each category of your spending. By adding the amount of cash you’re allowing yourself to spend per month, you can avoid overspending. Only use the cash amount in the envelopes, and don’t use your debit or credit card. Once the money is spent, you’ll have to discipline yourself to wait until next month to spend more money in that category.
Bills that can be automated should be set on auto-pay, and the rest of your bills should be paid with cash. The cash envelopes typically contain money for groceries, gas, eating out, essentials, and play money.
50/30/20 method: Another popular approach is the 50/30/20 method. Made famous by Elizabeth Warren’s book “All Your Worth: The Ultimate Lifetime Money Plan,” this method is flexible and outlines how to spend your money. The strategy involves allocating your cash to three expense items:
- 50% of your post-tax income on necessities
- 30% on fun activities
- 20% into your savings account
You can adjust the percentages based on your financial goals. For example, people who want to accelerate their savings may opt to put 30% into their savings accounts and 20% of their earnings into fun activities.
2. Collect your money trail
After deciding your strategy, it’s time to collect all your financial paperwork. This includes anything that tracks money coming in, money going out, credit card statements, past tax filing reports, receipts, and monthly expenses. If you pay for things in cash, keep your receipts. Make sure to put it in a secure place like filing them in a shoe box or scan them into a receipt folder on your computer.
This process may take some time, but it gets easier with practice. You can organize your finances in a spreadsheet to quickly review previous months and years.
3. Add up all budget categories
You can create your budgeting sheet using Excel, Google Sheets, or a free template available online. Once you have your budgeting outline ready to go, gather at least three months’ worth of statements. These statements will reveal your income levels and expenditures across different categories.
For example, to find your average monthly grocery bill, add up what you spent on groceries in the past three months and divide that value by three. If you spent $1,500 on groceries over the past three months, your average monthly spend is $500. You can use that number to calculate your projected monthly grocery bill.
If your income varies because of commission-based jobs or side hustles, base your budget on the lowest amount of money you make. You can treat your more successful months as bonuses.
During months when you make more, you can put the additional income toward debt, savings, or investments. Creating a budget based on slower months will result in less financial stress when you are in the slower months.
While you should use the lowest income amount for your budget, you should use the highest average amount for variable expenses. That way you won’t be short when you’re paying bills. Don’t overlook irregular expenses like your tax bill or vehicle maintenance payments.
4. Adjust spending habits
Organizing your income and expenses can help you make meaningful financial changes. Adjusting your spending habits can help you achieve financial goals, such as getting out of debt or building an emergency fund.
Your budgeting sheet will help you isolate the areas where you’re overspending and reveal opportunities to cut back where needed. Alternatively, noticing that you’d be more comfortable with additional money can motivate you to seek supplemental income.
Some of the easiest ways to cut back on spending are canceling cable subscriptions, pausing expensive gym memberships, skipping coffee runs, and eliminating the urge to get takeout. These tips can easily save hundreds of dollars.
5. Create an action plan
Now that you understand your spending patterns, you can develop a plan to support a better financial future. Set a time frame for your budgeting goals. For example, an aspiring homeowner who wants to make a $50,000 down payment would have to save $1,042 per month for four years to make the down payment.
With a budgeting plan in place, you get to decide where your hard-earned money is going. From investing your money in stocks or saving for your kid’s college tuition to taking that much-needed vacation, budgeting can make your dreams more likely to happen.
6. Put your money to work
Did you get your budget plan locked and loaded? Keep your budget at the forefront of your mind so you don’t forget about it. You did the planning, so all that is left is implementing your budget and moving closer to your financial goals.
You can also use the MoneyLion app** to keep you motivated. See all your finances in one convenient place for better financial management.
Budgeting like a pro
Few people maintain perfect budgets and remember that it is OK to make mistakes along the way. While overspending occasionally may not derail your finances, it is crucial to avoid letting small mistakes accumulate. It is fine to dine out occasionally, but it can become problematic if you turn it into a daily habit.
Mistakes allow you to learn, strengthen your resolve, and commit to your budget for the long run. Now that you understand how to create and implement a budget, it’s time to put it into practice.
FAQ
How to make a budget for beginners?
To make a budget for beginners, start by listing all sources of income and then track your monthly expenses to understand where your money goes. Dedicate some time each month to adjust your budget as needed to reflect changes in your financial situation.
What are the 6 steps in creating a budget?
The six steps to creating a budget include: (1) choosing a budgeting strategy that aligns with your financial goals, (2) collecting and organizing all financial documents and receipts, (3) calculating and categorizing your income and expenses, (4) identifying areas to adjust spending to support financial goals, (5) creating a detailed plan for saving and spending, and (6) implementing and regularly reviewing your budget to keep financial goals on track.
What are some common budgeting mistakes to avoid?
Not tracking your income and falling for temptations are common budgeting mistakes to avoid.
How often should you review and adjust your budget?
You should review and adjust your budget at least once every three months. Adjusting your budget monthly can help you stay on top of your finances.
Is it necessary to include every little expense in my budget?
It is necessary to include every little expense in your budget. It takes extra time, but you will become more conscious of every dollar you spend. Additional work can make a big difference in your long-term financial goals.
