7 Steps to Create a Personal Budget

7 Steps to Create a Personal Budget

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If you want to get a better handle on your income and expenses, creating a personal budget is definitely the way to go. It will help you see how much you’re really spending. You’ll be able to work on reducing expenses and increasing your savings.

Since most people use debit cards now to make a lot of purchases, it’s easy to lose track of how much you actually spend. Years ago, you took your paycheck to the bank and then took out some cash to make your purchases. Once you were almost out of cash, then you knew you had to curb your spending! Debit cards are so much more convenient than cash, but paying for something with a debit card can make it seem less painful that paying with cash.

The great news is that making a budget is not that hard, and pretty much anyone can do it. When done right, making a budget is a great way to take control of your finances. It can even help you reach financial goals.

Step 1: Collect Your Financial Paperwork

Before you sit down to begin working on your budget, you should gather up any documentation that would help you to determine your income and expenses. These could include:

  • Paystubs
  • Tax returns, W-2s, and 1099s
  • Bank statements
  • Recent utility bills
  • Credit card statements
  • Mortgage and loan statements
  • Investment account statements
  • Receipts from the last few months

Step 2: Determine Your Monthly Income

You want to calculate how much income you make each month. If you are a W-2 wage earner with a regular paycheck, it’s best to calculate your net income (take-home pay) amount for each month. If your income varies each month, you could calculate an average amount based on income that you expect to receive, or you could use the income from your lowest-earning month in the past year. If you sometimes get a bonus that isn’t guaranteed, it’s best to leave that out.

Be sure to include an additional sources of income, such as child support or Social Security. If you are self-employed, your prior year tax returns can help you to calculate an average monthly income amount.

Step 3: Calculate Your Monthly Expenses

Use your recent financial paperwork to help you create a list of your monthly expenses. Monthly expenses for most people could include the following:

  • Mortgage or rent payment
  • Car or personal loans
  • Student loans
  • Utilities
  • Groceries
  • Restaurant meals
  • Insurance
  • Transportation
  • Personal care
  • Clothing
  • Child care
  • Car maintenance
  • Entertainment
  • Gym membership
  • Travel
  • Gifts and donations
  • Savings

Step 4: Set Your Financial Goals

Make a list of short-term and long-term financial goals that you’d like to achieve. Short-term goals could include things like reducing credit card debt, buying a new car, planning a vacation, or buying a new computer. Long-term goals, like saving for retirement or your child’s education, could take years to achieve.

Identifying these kinds of goals now will help you identify your priorities and things that are important to you before planning your budget.

Step 5: Make Your Budget Plan

If you have more monthly income than expenses, you’re off to a great start! If not, that just means you’re got some adjusting to do.

A popular budget guideline that you could follow is the 50-30-20 budget rule. This line of thought suggests that essential expenses and needs should make up half of your budget, wants should make up about 30%, and savings and loan repayments should make up the other 20%.

One of the most customizable digital budgeting tools available is PocketSmith. They have an app that can help you with planning and tracking your budget. Use my link if you’d like to save 50% off your first two months of their premium plan: PocketSmith.

You may have also heard of Dave Ramsey’s 7 Baby Steps Plan. He suggests saving for emergencies, paying off debt for good, and building wealth with the following steps:

  1. Save $1,000 for your starter emergency fund.
  2. Pay off all debt, except for your house.
  3. Save 3-6 months of expenses in an emergency fund.
  4. Invest 15% of your household income in retirement.
  5. Save for your children’s college fund.
  6. Pay off your home.
  7. Build wealth and give.

Dave Ramsey also has a popular budgeting app called EveryDollar that may help you track your budget. He also has a best-selling book called The Total Money Makeover: A Proven Plan for Financial Fitness that you might add to your reading list.

If you prefer a tried-and-true, non-digital method of tracking your budget, here’s a best-selling budget planner that comes in so many different colors to choose from: Clever Fox Budget Planner.

Check out my How to Save $1,000 for an Emergency Fund in 90 Days or Less blog post.

Step 6: Adjust Your Spending Habits

Once you’ve made it through the above steps, you should be able to see where you have money left over or where you can reduce expenses to help reach your goals.

Of course, discretionary spending is the first area where cuts can be made. Try swapping a few nights of eating out for home-cooked meals or watching movies at home instead of at the theater. Maybe you can swap internet or cell service providers for a money-saving promotional deal.

If your monthly expenses are still more than your income, it may be time to evaluate your fixed expenses. For example, maybe you could swap an expensive car payment for something more affordable, or you could try moving to a less expensive neighborhood or city. These kinds of decisions can difficult and should be evaluated carefully.

Step 7: Review Your Budget

Because your income and expenses can change over time, you will want to periodically re-evaluate them. You should review your budget at least once a year, but you might need to do it more frequently, depending on how stable your income is.

Let me know how your budgeting goes!

Check out some of my other posts on saving, making, and investing money:

Disclaimer: This information is intended for educational purposes and is not tailored for the needs of any specific investor. It is important to conduct your own analysis and research before making any investment.  It is recommended to independently research and verify or seek financial advice from a professional in connection with any information on this website before using it to make an investment decision or otherwise.

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