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JULY 2022

Build a budget in 5 steps

How do you define “budget”? Many people think of it as a belt-tightening approach to spending. But it’s far more positive than that. A budget is a plan for what you do with your money. And it’s designed to serve you and your goals. When you learn how to create a budget — and keep it going every month — you’re giving your money purpose. You’re taking control.

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No matter what financial goals you have, no matter what your income, you can make a budget — and live with it comfortably — in just five steps.

Step 1: List your income.

Income is any money you plan to receive during the month. That means your normal paychecks plus any extra money that comes your way, such as income from garage sales or freelance work. Create separate income budget lines for every paycheck you (and your spouse or partner) earn, plus anything extra.

The amount you indicate should be your net income (what you earn after taxes and other deductions). If your income is less predictable, look at what you’ve made the last few months and list the lowest amount as this month’s planned income budget line. You can adjust later in the month if you make more and add that extra money to your money goal or another budget line.

Step 2: List your expenses.

Now that you’ve planned for the money coming in, you can plan for the money going out. It’s time to list your expenses. Budget for your savings goals, such as an emergency fund. You’ve got to pay yourself first before you pay everyone else!

After that, list food, utilities, shelter and transportation. Make a budget category for each of these items, and add lines underneath for your specific expenses. (Think of a budget category as a folder, and the lines as the files inside it.)

Some are fixed expenses, that is, expenses that stay the same every month, like your rent or mortgage. Other expenses, like groceries or gasoline, change each month. Just start with your best guess based on your past spending.

Next, list all other monthly expenses. Start with essentials, such as insurance, debt, childcare, etc. Then add a miscellaneous line, followed by nonessentials like personal spending, fun money and entertainment.

Step 3: Subtract expenses from income.

Subtract all your expenses from your income. This number should equal zero. That doesn’t mean you let your bank account reach zero. Leave a little buffer in there of about $100–300. If you subtract your expenses from your income and have money left over, put it toward your current money goal.

If you end up with a negative number, just cut expenses, preferably from your dining out and entertainment budget lines, until your income minus your expenses equals zero. If you’re still struggling to make ends meet, don’t forget you can work overtime or explore ways to add to your income. Just remember not to increase your spending when you increase your income. Your extra cash needs to cover your budgeted expenses.

Step 4: Track your expenses.

If you don’t make yourself accountable by tracking your expenses, a budget is just a list of good intentions. Tracking expenses will help you:

• Stay accountable to your budget, yourself and your money goals.
• Keep from overspending, because as you enter expenses, you’ll know what’s left so you don’t overspend.
• Stay on top of the budget. When you track transactions, you can make appropriate adjustments as you need to.
• Learn and adjust your spending habits so you can get back on track with your goals.

Step 5: Make a new budget before the month begins.

Copy this month’s budget over to the next, and make changes for anything new that’s coming. That way, you’ll be prepared for birthday, holiday and anniversary expenses; back-to-school shopping; semi-annual expenses, such as car maintenance; and annual expenses, such as vaccinations for your pets. To plan for these expenses, create a budget category such as “month-specific stuff,” and update it as needed.

How do you pay for these month-specific items? Cut back spending somewhere else, and move that money over to this category. If this sounds too complicated or difficult, don’t be discouraged. It typically takes around three months to get comfortable with budgeting, so keep working on it! The benefits of budgeting are worth the effort.

Source: Ramsey Solutions. How to make a budget: your step-by-step guide.

Looking for ways to improve your money-management skills? The following resource can help.