How to Create a Budget: The Ultimate 6-Step Guide

how to create a budget

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How to Create a Budget: The Ultimate 6-Step Guide – Sometimes, it is hard to know where to start to get your finances under control. It can feel hopeless before you have even started. You do not want to figure it out alone and you do not have a clue when it comes to a budget. That is why you have me to walk you through ‘How to Create a Budget: The Ultimate 6-Step Guide’.




 

How to Create a Budget: The Ultimate 6-Step Guide

1. Determine your monthly income

Before you can create a budget, you must first calculate your monthly income. This step is vital for your budget, so make sure you do it before anything else. Make a list of all your sources of income. Include your salary plus any additional income you make. It should include second jobs, dividends, rental property income, and side hustles. If your income varies, use the average income of the last 3-6 months.

 

Example:

Salary – $3,000

Dividends – $150

Part-time job – $900

 

2. Add up your fixed & variable expenses

In this step, you need to list your mandatory monthly expenses, then add them up. These are the expenses that you must pay each month. Some will be the same amount each month (mortgage/rent) and others will vary from month-to-month (utilities). Include your mortgage/rent, student loans, electric, gas, water, car payment, groceries, insurance premiums, and any other expenses you are required to pay monthly.

 

Since budgeting is new to you, you may be lost on your expenses. In that case, check all your accounts from the last 3 months. Use the average so that your numbers can be as accurate as possible.

 

Example:

Salary – $3,000

Dividends – $150

Part-time job – $900

Mortgage – $1,500

Electric – $100

Groceries – $300

Car payment – $250

 

3. Establish financial goals

Now comes the fun part; setting financial goals for yourself. This step is super important, but is forgotten – often. That is because we like to think that any money left after paying fixed & variable expenses is fair game to spend. WRONG! Before any ‘left over’ money is budgeted for fun stuff, set financial goals and put this money toward those.

 

Take a look at where you are now, financially speaking. Where would you like to be? Think about the short-term and long-term.

 

Your goals may look something like this:

  • build a 6-month emergency fund
  • fund a 401K
  • become debt-free in 10 years

 

Now that you have set your financial goals, treat them as expenses and add them into your budget. Pay these each month just like you would any of your other fixed expenses.

 

Example:

Salary – $3,000

Dividends – $150

Part-time job – $900

Mortgage – $1,500

Electric – $100

Groceries – $300

Car payment – $250

Emergency fund – $300

401K contribution – $150

Additional debt payment (mortgage/car) – $300

 


4. Determine your discretionary expenses

Discretionary expenses is another way of saying ‘fun stuff‘. These are expenses that you pay that are not vital. Entertainment, dining out, vacations, and self-pampering are all discretionary expenses. These types of expenses are only to be added into your budget if there is money left for them after Steps 1-3.

 

Example:

Salary – $3,000

Dividends – $150

Part-time job – $900

Mortgage – $1,500

Electric – $100

Groceries – $300

Car payment – $250

Emergency fund – $300

401K contribution – $150

Additional debt payment (mortgage/car) – $300

Entertainment – $50

Dining out – $75

Beauty – $50

 

5. Subtract your expenses from your income

This step is what you are here for! Finally, the good part where it all ties together. Everything you have done up to this point has led you to creating your budget. You have already done the hard work. Now you just need to subtract your total expenses from your total income. How did you make out? Did you end up with a positive number, a negative, or did you break even?

 

If you are in the positive, way to go. You are making more money than you are spending. You are right where you need to be. And since you did not use up all your income, you can assign that money a task. Put it toward your current debt or slip it into your emergency fund. Use each and every dollar.

 

If you break even, go back through your expenses and make adjustments. You want to have some room between what you spend and what you make. Adjust your discretionary expenses or start a side hustle.

 

If you are in the negative, you need to make changes to your budget immediately. Eliminate your discretionary expenses and find ways to save money. Or increase your income if you need to. (You can always add discretionary expenses back in later on if your budget allows for them.)

 

6. Apply, observe, & adjust

Lastly, you need to apply, observe, and adjust your budget regularly. Not every month will be the same. Incomes change, expenses change, and so do financial goals. You have to keep up with these for your budget to continue working.

 

Schedule budget meetings with your other half to review your budget regularly. For you, this might be once a week or once a month. You both have to be on the same page and aware of what is unfolding if you want your budget to succeed. If something is not working, work together to make the necessary adjustments.

 

In the beginning, budgeting is not easy. It will most likely take you a few months to really nail down what works for you. And that is OK. What is most important is that you have a budget in place and know where you stand. That puts you one step ahead of most. Just stick with it and you will conquer your money!

 


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