The word “budget” seems to have a negative connotation.
It’s the financial version of the word “diet,” associated with fewer splurges and less fun.
However, this isn’t necessarily true. While it may seem like you’re cutting back (and you likely are – a little, at least), budgets promote efficient and responsible spending.
More importantly, though, they enable you to prioritize what’s really important to you. Whether your goal is to purchase all-organic groceries, have the ability to travel, earn a little extra money on social media, or make strides toward being a homeowner, a budget will help you get there.
While creating your own personal budget may seem intimidating, it’s anything but! Here, we’ll break it down for you in five simple steps, and if you want to make your life even easier, be sure to download our free personal budget template.
How to make a budget
- Determine your total monthly income
- Total up your estimated monthly expenses
- Calculate net income and adjust as needed
- Record monthly spending and track progress
- Revisit whenever your financial situation changes
Let’s get started!
How to make a budget
Making a budget is simple, but will require a bit of time to ensure you’re accurately tracking your spending. Additionally, learning how to properly budget your own money can help get you ahead at work! When somebody on your team is trying to master event planning or determine whether the company can afford a custom Snapchat geofilter, your knowledge will be invaluable.
Now, let’s get started! And as a quick reminder, steps one and two can (and should) be done simultaneously.
1. Determine your total monthly income
First things first – you’ll need to determine your total monthly income, after taxes. However, this is more than just your regular salary or income. For example, maybe on top of your working salary, your PoshMark account brings in an extra $250. Or, perhaps you collect child support or rent out a property on Airbnb.
Wherever your additional income may come from, be sure to add it to your total! If this income isn’t regular, track it over a couple of months, calculate the average, and use that number.
2. Calculate your estimated monthly expenses
This is where the process can be a bit more time-consuming, but it’s worth it to know you have an accurate representation of your spending each month.
You’ll want to start tracking your expenses a few months before you finalize your budget. This will allow you a more comprehensive understanding of what you’re really spending on groceries, subscriptions, dining out, and more.
You can also do this all at once by looking at previous bank statements, credit card bills, and receipts, but I’d recommend tracking your actual spending for a bit, or at least a combination of both, to make it easier on yourself. Consider using an expense tracker on your iOS or Android device.
For example, track the amount you spend on groceries per week for eight weeks. At the end of that period, divide the weekly amount by eight to find the average. That average is the amount, per week, you’d budget to spend on groceries.
In this case, it’s important to be thorough. I’d be kidding myself if I didn’t include my bi-weekly trip to Target, or the way-too-expensive coffee on my way to work, as much as I’d like to pretend they don’t happen. Including these “fun” expenses are how you ensure a budget that will work for your lifestyle and make room for your treats.
And don’t forget about recurring expenses, either. These are the expenses that stay the same month-by-month – things like gym memberships, your Spotify subscription, car payments, and of course, rent and utilities.
Last but not least, factor in the unexpected bills like visits to the doctor or car payments. To do this, calculate your total expenses (by adding up all of the numbers above), and then consider adding an additional 10-15 percent. On months you don’t use this money, it can go into a savings account or be put toward that plane ticket home.
On the months you do need it, you’ll be happy it’s there.
3. Determine your net income and adjust as needed
Now that you have an idea of what you’re spending and making each month, you’ll need to see how the numbers compare to each other. If you’re making more than you spend, then great! This is money you can (and should) use to invest, save, or pay off those nasty student loans.
However, if you’re spending more than you make, you’ll need to make cuts somewhere. For example, try looking at all of your monthly subscriptions and cutting out the ones you don’t actually use. Or, consider limiting your lunches out and packing a sandwich instead.
When it comes to spending and saving, everybody has different priorities and long-term goals. Determine what expenses to limit (or cut out altogether) based on what works for you and your lifestyle.
4. Use your budget to record spending and track progress toward your goals
The hardest part is over! Now that you have your budget, you simply need to keep it up to date to ensure you’re not going over your monthly spending limits. This means documenting all of your purchases (yes, that includes Lyft rides and Venmo transactions)!
To do this, I recommend keeping track of your spending in a Microsoft Excel spreadsheet (or, download our personal budget template below). Consider setting aside five minutes to do this at the end of every day, or twenty minutes every Friday afternoon – whatever works for your schedule. That said, keeping track regularly is important – it’s how you’ll know whether you can afford that last minute manicure or if you need to stretch your groceries for a few more days.
5. Revisit your budget as needed (any time your financial situation changes)
Finally, be sure to revisit your budget every so often to make sure it’s still accurate, or make adjustments as needed.
For example, maybe you’ll get a raise (congrats!), choose a more expensive gym membership, or finally get kicked off your parents’ phone plan. All of these will affect either your spending or your income, and potentially require you to adjust your budget a bit.
To get started on creating your own personal budget, check out our free and downloadable template below!
Monthly budget template
For a jump start in creating your own personal budget, download our free template below!
Personal budgets promote smart spending
Sticking to a budget doesn't mean you’ll have any less fun. What it does mean, though, is that you’ll be able to spend effectively while working toward your long-term financial goals.
For even more tips on self-improvement, be sure to check out our additional resources: