A budget is a roadmap for where your money will go so you can make your hard-earned income work for you. Budgets assign your money a job and establish spending limits for specific expenditures so you can use your money responsibly.
Creating a personalized budget is essential to developing the right spending habits , setting aside money for the long term , and ensuring the money in your bank account goes where it needs to. But how do you make a budget? Getting started with your first budget may seem complicated, but this Budgeting article will walk you through every step in the process.
You'll learn how to budget, how to avoid common budgeting mistakes, and how to ensure your budget is one you can actually stick to. According to surveys, only around a third of all households live by a strict budget. By deciding to budget, you're joining a select minority -- and your decision will pay off.
Budgeters are almost twice as likely to report no financial worries compared with spenders, and they're less likely to live paycheck to paycheck or struggle with finances. While budgeting is always a great decision, it's good to define goals before you start the process, since the reasons you're budgeting may impact choices you make during the process.
Common reasons to create a budget include:. While it may seem silly to think about your motivations, psychology plays a big role in how we handle money.
In fact, University of Maryland research into budgeting showed the process of creating a budget makes it more likely goals will be achieved because the process of hashing out the numbers creates an emotional investment, enhances motivation, and discourages cheating. Before you can create a realistic budget, you need to know what your current spending habits are. If your budget isn't realistic, it's nothing more than a wishlist.
You won't know if your budget is realistic until you've got an idea of where your money is currently going. Most experts recommend tracking your spending for about 30 days to get a clear picture of spending. There are a few ways to track spending:. Fewer than half of all Americans responding to Consumer Financial Literacy surveys indicate they have even a "somewhat good idea," what they're spending on food, housing, entertainment, and other essential expenditures -- so figuring out where your money is going must be part of the budget process.
While tracking spending shows you where money goes on a day-to-day basis, your budget should also factor in funds for irregular expenses, such as holidays and birthdays.
Half of those who borrowed would still be repaying holiday debt at least three months later. By budgeting throughout the year, you'll never get into holiday debt again. Some irregular expenses in your budget might include:. Your calendar and past credit card statements will help you make a list of all expenses that crop up throughout the year.
Budgeting is about making the best use of income, so you need to know how much money you have coming in. Factor in income from all sources including:. If your income is variable , one of the best budgeting approaches is to pay yourself a salary. This means you'll decide on a monthly "salary" to base your budget around and when extra money comes in, save it in case of a bad month later. Like money management, your laundry is an ongoing responsibility that cannot be avoided, ignored or forgotten without some serious consequences.
Going into your brand new budget with the acknowledgement that you are committing to a regular and ongoing process will help you maintain your budget, which is far more important than just creating one. To get ready for this new, ongoing task, Janine and Henry schedule weekly time to go over their budget together.
For anyone who receives a salary from a traditional employer, this part will be very simple. Knowing this amount gives her a starting point for calculating her budget. However, if you work as a freelancer, have side hustles, earn hourly pay or overtime or rely on tips or commission, your monthly income is a little more difficult to calculate. In that case, gather your income information for the past three to six months and calculate the average.
This can give you an understanding of how much you earn each month on average. Henry works as a freelancer, so his income fluctuates. Your necessary expenses are the bare minimum you need each month to maintain your life. These include fixed expenses and variable necessities.
Most people have a basic sense of their fixed, or recurring, expenses. For instance, you know exactly how much you pay for your rent or mortgage each month. These are the variable but necessary expenses that can change from month to month. Include the following irregular-but-necessary expenditures:.
Paying yourself means funding financial goals and plans before spending your discretionary money. But planning on using leftover money often means your goals are left out.
So the next step in creating a sustainable budget is to create line items in your budget for your major goals. When you have chosen your goals, figure out how much you will pay toward each one every month. If you have a deadline in mind, divide the amount of money your goal will take by the number of months until the deadline to determine your monthly savings amount. Add these pay-yourself-first amounts to your fixed expenses.
Considering your financial goals to be fixed expenses and line items in your monthly budget will help you get in the habit of prioritizing your goals. They decide to pay the following amounts toward each goal:.
These are the expenditures that you want rather than need. They may include things like entertainment, dining out, clothing and the like. Categorize your expenses. Keep your tracking consistent. Explore other options. Identify room for change. Free online spreadsheets and templates can make budgeting easier.
Start with a financial self-assessment. Once you know where you stand and what you hope to accomplish, pick a budgeting system that works for you. We like the simplicity of this plan. Over the long term, someone who follows these guidelines will have manageable debt, room to indulge occasionally, and savings to pay irregular or unexpected expenses and retire comfortably. Find out how this budgeting approach applies to your money. Savings and debt repayment.
Track your monthly spending trends to break down your needs and wants. Minimum loan payments. Anything beyond the minimum goes into the savings and debt repayment category. Child care or other expenses you need so you can work. You may find a better cell phone plan , an opportunity to refinance your mortgage or less expensive car insurance. That leaves you more to work with elsewhere. Separating wants from needs can be difficult. In general, though, needs are essential for you to live and work.
Typical wants include dinners out, gifts, travel and entertainment. Are restorative spa visits including tips for a massage a want or a need? Well, it does this math for you. Can I let you in on a little secret? That means you put every expense and every bit of income into your budget all month long.
This is when you get ready for everything coming your way next month, you guys. Make a new budget—every single month. That means your goal for this step of your money journey is to save, save, save! I created a budgeting guide specifically for you here. Wherever you are in your financial journey, the quickest way to do a budget is by using our free budgeting tool I keep mentioning. Start your free trial today and get instant access to EveryDollar, Financial Peace University, and so much more.
Rachel Cruze is a two-time 1 national bestselling author, financial expert and host of The Rachel Cruze Show. Since , Rachel has served at Ramsey Solutions, where she teaches people how to avoid debt, save money, budget and win with money at any stage in life. Learn More. Guided Plans. Trusted Pros. Free Tools.
How Can Budgeting Help Me? Here are the top 15 budgeting tips! Budget to zero before the month begins. About the author Rachel Cruze. More Articles From Rachel. Answer a few questions, and we'll create a plan tailored just for you. It only takes three minutes! Ever wonder where all your money goes?
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