Creating a budget in 6 easy steps is the perfect way to know the ins and outs of your money. You will be able to see your income and expenses to know exactly where your money is going. A budget will keep you from wondering where your money went. A budget will also tell your money where to go. So, let’s dive in…
Step #1: Grab your desired tools to make your first budget. I recommend a pen, paper and a calculator – Or if you are fancy, feel free to create an excel spreadsheet and build in the necessary formulas or create a digital budget online with an app like Mint or EveryDollar.
However, I always recommend to manually write out your first budget because there is just something about putting pen to paper and making the necessary subtractions, additions, doodles, etc. This is how you really FEEL the numbers and the process.
Step #2: Start with A Goal! At the top of your sheet of paper/budget write out your goal for creating this budget.
Examples of Goals: Determine where every dollar of my income is going. Find any money leaks because I feel like I make enough money but still come up short before the end of the month. Determine how much I am actually spending on shopping, eating out, etc. Find an area I can cut back on so I can save more money, cash flow a vacation or pay more money toward my personal debt.
Now it is time for the numbers
Step #3 List out all of your Income (All sources: Paychecks, business income, side hustles, etc.)
If you have inconsistent income take the average of 3 months and use that as your income.
Example: In the last 3 months your income was: $2000 (month one), $1000 (month two) and $1500 (month three). To find the average you will add up all of the income and then divide by how many months there are. So, $4500 (sum of all numbers) / 3 (amount of numbers or months) = $1500. $1500 would be the average and therefore use that amount as your average monthly income to budget off of. If during the month you are budgeting for your income is higher than your average then the additional income can be applied toward your goal or rolled into next month. This is great way to handle additional income since your income is inconsistent and you based your budget off of a lower number.
Step #4 List and add up all your monthly necessary expenses then subtract them from your income
Non-Discretionary expenses are the expenses that are absolutely due each month: Housing, Electricity, Water, Sewer, Trash, Insurance (life, car, medical, long term disability, etc. – if these aren’t deducted from your paycheck)
Other necessities to include:
Gas/fuel/ transportation costs
Pay your future self fund – because you need to save for your future self – so pay yourself just like you pay a bill
Debt Minimums: Credit Card(s)/Personal Loans/Car Loan/Student Loans/Medical debt, etc. (It would be great if this number was zero)
Stop here and see what you are left with…circle or highlight that amount
Take a moment and look at what amount of money you have left after covering your non-discretionary expenses because everything in the next step are expenses that are discretionary and are what you have control of. This is an area in your budget where you can possibly eliminate items or reduce amounts spent in this area.
Step #5 List and add up all of your discretionary expenses and then subtract them from the last number you calculated.
Discretionary expenses are flexible and sometimes optional. This is where you can find money to help you achieve your financial goals like growing your savings account, adding to retirement, putting more money toward debt, etc.
Entertainment categories like dining out
Personal care (hair care/styling, manicure, pedicure, waxing, grooming)
Subscriptions and Memberships
Step #6 Clap for yourself because you have successfully created your very own budget.
Fingers crossed your budget ends in the “black” with a positive number meaning you have some money left over. If you end up in the “red” with a negative number then you have some more work to do. Time to think about… can you cut out an expense, cancel a subscription, reduce spending in a certain area, pick up overtime or pick up a side hustle to put you in the “black” because you don’t want to come up short.
“Tell Your Money Exactly Where to Go and You’ll Not Wonder Where It Went”
Have a goal for your monthly budget then get to work by adding up your income and subtracting your expenses from your income.
Good News – you got a positive number so you have money left to attack your goal.
Bad News – you have a negative number so you will need to revisit your expenses and see where you can cut back because if you have a short fall, either something isn’t going to get paid or you may end up going into debt to make ends meet. Another awesome option is to make more money. Especially if you don’t want to cut back or you simply can’t cut back anymore so you will have to bring in more income to cover the gap.
And now the best part! Stick to the budget you created so you will know where your money is going and then start to smash your financial goals! I know the word budget has a negative connotation but it is truly the only way that you will know where all of your money is going.
Thank You and Please comment with your thoughts surrounding budgets. Do you create one? Why or Why not? Do you have any questions about making a budget?