Ever feel like you’re stuck in a never-ending paycheck race? You work, work, work, that money hits your account, and then… poof! It’s like David Copperfield made it disappear. Sound familiar? If you’re tired of feeling like your cash is slipping through your fingers, this guide is for you.
You don’t need a fancy Ph.D. in economics to get your finances in order. All you need is a simple plan, a little discipline, and the willpower to say “no” to those tempting impulse buys (because, let’s be honest, those cute cat videos on YouTube won’t pay the bills).
Think of your budget as a leash for your finances. It keeps your spending in check and stops it from running wild, leaving you with nothing but an empty wallet and a fridge full of… well, hopefully groceries, not takeout every night.
As the great motivational speaker Jim Rohn said, “Either you control your money or it controls you.” So, let’s grab the leash and learn how to build a budget that works for you!
How To Make A Budget In 5 Steps?
Step 1: Organize Your Income and Expenses
Alright, time to be an adult. The first step to building a healthy budget is understanding your financial landscape. Let’s break it down before you scream HOW?
1. Identifying Your Income Streams:
- Primary Source: This is your main source of income, typically your paycheck from your employer. List your pre-tax monthly income (before taxes and deductions are taken out). If you get paid bi-weekly, multiply your paycheck amount by 2.6 to get a rough estimate of your monthly income.
- Secondary Sources: Do you have any side hustles that bring in extra cash? This could be dog walking, freelance writing, driving for a ride-sharing service, or even selling crafts on Etsy. List each source of income and its average monthly contribution. Be realistic – don’t overestimate how much you earn from these side hustles.
- Gifts & Bonuses: Include occasional sources of income like birthday money, holiday bonuses, or tax refunds. While you shouldn’t rely on these, they can be a nice boost to your savings or help cover unexpected expenses.
Example:
- Primary Source: Monthly paycheck – $3,000
- Secondary Source: Dog walking – $200
- Gifts & Bonuses: Birthday money from Aunt Edna – $100 (hopefully, you won’t spend it all at once!)
2. Listing Your Expenses:
Now, let’s explore the outflows – where your hard-earned money goes. Here’s where categorizing your expenses becomes crucial:
(i) Fixed Costs: These are the bills you can pretty much set on autopilot because they stay the same each month. Think of them as the pillars of your financial foundation. Examples include:
- Rent or mortgage payment
- Car payment
- Student loan payment
- Insurance (car, renters, health)
- Utility bills (electricity, water, gas)
- Internet and phone bills
- Minimum payments on credit cards or other loans (be sure to list the minimum payment amount)
Tip: Gather your recent bills or bank statements to get accurate figures for these fixed costs.
(ii) Variable Costs: These expenses can fluctuate from month to month, depending on your needs and wants. Think of them as the winds of your financial landscape, sometimes gentle breezes, sometimes strong gusts. Examples include:
- Groceries (estimate a realistic amount based on your typical shopping habits)
- Gas (estimate how much you typically spend on gas for your car)
- Entertainment (movies, concerts, nights out) – allocate a realistic amount based on your typical spending habits
- Dining out (eating at restaurants) – again, be realistic about how often you eat out
- Personal care items (shampoo, toothpaste, makeup)
- Clothing (be honest with yourself – how much do you need vs. want?)
- Transportation costs (bus fare, train tickets)
- Subscriptions (streaming services, gym memberships, etc.) – review your subscriptions and list the monthly fees
Tip: Track your variable costs for a month to get a good idea of your average spending in each category. You can use a budgeting app, a spreadsheet, or even just a pen and paper to do this.
3. The Power Of Categorization:
By dividing your income and expenses into these categories, you’re essentially creating a financial snapshot. You can see where your money is coming from and where it’s going. This is critical for gaining control of your finances. Once you see how much you’re spending in each category, you can start to identify areas where you can cut back and free up extra money to save or pay down debt.
Example:
Income:
- Primary Source: $3,000
- Secondary Source: $200
- Gifts & Bonuses: $100
- Total Income: $3,300
Expenses:
Fixed Costs:
- Rent: $1,000
- Car Payment: $250
- Student Loan Payment: $150
- Utilities: $120
- Internet & Phone: $80
- Insurance: $100
- Minimum Debt Payments: $50
- Total Fixed Costs: $1,750
Variable Costs:
- Groceries: $400 (estimated based on your tracking)
- Gas: $100 (estimated based on your tracking)
- Entertainment: $50 (estimated based on your tracking)
Step 2: Track Your Spending Closely
Now that you’ve identified your income streams and categorized your expenses, it’s time to track it .For a month, keep track of every penny you spend. We’re talking about the private investigator level of detail here. Every coffee, every grocery trip, that evening out with friends – everything goes on the list.
(i) Pen and Paper: Grab a notebook and write down every expense throughout the month. This old-school method can be surprisingly effective, especially for those who enjoy the tactile satisfaction of pen meeting paper.
(ii) Try these Budgeting apps:
1. YNAB (You Need A Budget): This app is great for those who want to get serious about budgeting and take control of their spending.
YNAB uses a method where you assign every dollar you earn a specific purpose, helping you avoid overspending and reach your financial goals faster.
Fees: $14.99/month or $99/year, after 34-day trial
2. Quicken Simplifi: If you’re looking for an easy-to-use app with helpful features, Quicken Simplifi might be a good fit. It automatically categorizes your transactions and lets you set spending goals to stay on track.
Fees: $35.88/year
3. PocketGuard: This app is all about finding ways to save you money. PocketGuard analyzes your spending habits and identifies areas where you can cut back. It can also help you track your bills and avoid overdraft fees.
Fees: Free version; Plus is $12.99/month or $74.99/year
4. Empower : While Empower is primarily an investment platform, their free app offers budgeting features. You can track your spending, set goals, and receive personalized insights to help you manage your money better.
Fees: Free
5. Cleo: This app uses a fun and interactive way to manage your finances. Cleo, a virtual financial assistant, helps you track your spending, pay bills on time, and build your savings through conversations and personalized advice.
Fees: Cleo is a free app with optional premium features available for a monthly subscription.
6. EveryDollar: This app is a good option for those who prefer a simpler approach to budgeting. Based on Dave Ramsey’s zero-based budgeting method, EveryDollar helps you ensure every dollar of your income is allocated towards a specific purpose.
Fees: Free version; Premium is $17.99/month or $79.99/year, after 14-day trial.
These apps can make tracking expenses a breeze, with features like automatic transaction imports and spending category breakdowns.
We’ve all been there. You try to track your spending, but somehow that latte you swear you bought last week mysteriously vanishes from your expense sheet.
Here are some common fails to avoid:
- The “I’ll Do It Later” Trap: This one’s a classic. You tell yourself you’ll diligently record every expense later, but then later never comes, and suddenly you’re left with a financial mystery on your hands.
- The “Round to the Nearest Hundred” Method: This might seem harmless, but those little rounding errors can add up over time. Be honest with yourself, that $3.25 latte wasn’t actually $3.00.
- The “Cash is King (or Queen)” Excuse: Cash can be tricky to track. If you use cash regularly, make sure to factor it into your expense sheet at the end of the day. Every penny counts, remember?
This initial tracking phase might feel tedious at first, but trust me, it’s an eye-opener. You might be surprised at how those daily lattes add up, or how those weekend movie nights secretly drain your bank account. By diligently tracking your spending, you’re essentially shining a light on those sneaky little expenses that have been silently chipping away at your financial well-being.
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Step 3: Use The 50/30/20 Rule
Here’s where things get fun (well, maybe fun isn’t the right word, but definitely manageable). Financial guru Dave Ramsey suggests a simple budgeting method called the 50/30/20 rule. Think of it as your financial BFF – it’ll be there to guide you and keep you on track. Here’s how it breaks down:
(i) 50% Needs: This is the bread and butter of your budget (pun intended). These are the essential expenses you need to survive – rent or mortgage payments, utilities (electricity, water, gas), groceries, transportation costs (car payment, gas, bus fare), minimum debt payments (credit card minimums, student loan minimums). Basically, the things that keep a roof over your head and food in your belly.
Imagine this 50% as the foundation of your house. Without a solid foundation, the rest of the structure crumbles. So, it’s crucial to allocate enough money towards these essential needs to ensure your financial stability.
Pro Tip: While the 50% target is a good starting point, your actual needs might require a slightly higher or lower allocation. For example, if you live in a big city with high rent costs, your needs category might be closer to 60%. The key is to be realistic about your essential expenses.
(ii) 30% Wants: This is your fun money! That new video game, dinners out with friends, that concert ticket you’ve been eyeing, a subscription to that streaming service with all the shows you want to watch. This is your chance to reward yourself for your hard work and enjoy some of the finer things in life. But remember, keep it within your 30% limit.
Think of this 30% as the fun furniture in your house. It adds personality and makes the space feel comfortable, but you don’t necessarily need a whole mansion full of furniture to live a good life.
Pro Tip: There will be times when you want something outside your budget. Don’t beat yourself up! The key is to be mindful and adjust your spending in other categories to make room for that special treat. For example, maybe you brown-bag your lunch a few extra times this month to save up for that concert ticket.
(iii) 20% Savings & Debt Payoff: This is your future self giving you a high five. Stick 20% of your income towards savings goals (vacation fund, emergency fund, down payment on a house) or put it towards paying off debt (credit cards, student loans). This might seem like a big chunk of change, but trust me, in the future you will thank you for prioritizing your financial security.
Imagine this 20% as your investment in the future. It’s the savings that will help you weather financial storms, achieve your long-term goals, and live a life free from financial stress.
Pro Tip: If you’re struggling to save 20%, start small. Even 10% is a great start! As your income increases or your spending habits improve, you can gradually bump up that savings percentage.
Step 4: Find Ways To Save Money
Now you know where your money goes (thanks to Step 2: Track Your Spending Closely) and how to allocate it effectively (thanks to Step 3: The 50/30/20 Rule). Let’s see where you can tighten your belt a bit and free up some extra cash.
Pro Tip: The “Can I Live Without It?” Challenge
For every expense you’re unsure about, ask yourself the age-old question: “Can I live without it?” Be honest! Does that daily latte habit truly bring you joy, or is it more of a mindless scroll-through-social-media pick-me-up?
Could you brown-bag your lunch a few times a week instead of eating out? Remember, small changes can add up to big savings.
Here are some tips to help you trim the fat without starving your budget:
(i) Review Your Variable Expenses: Take a close look at your variable expenses, like groceries, entertainment, and dining out. Are there any areas where you can cut back? Here are a few ideas:
- Groceries: Plan your meals for the week and create a grocery list to avoid impulse purchases. Consider buying store brand items instead of name brands and utilize coupons and discounts.
- Entertainment: There are tons of free or low-cost entertainment options available. Explore free museum days, check out local parks and hiking trails, or have a game night with friends at home.
- Dining Out: Eating out can be a major budget drain. Limit eating out to once or twice a week and try to cook more meals at home.
(ii) Negotiate Like a Boss: Don’t be afraid to haggle! Those cable and internet bills might be negotiable. Call your providers and see if they can offer you a better deal. The worst they can say is no, and the best they can say is… savings!
(iii) Unsubscribe From Unused Subscriptions: We all have those forgotten subscriptions lingering like digital ghosts in the corner of our bank accounts. Gym memberships you never use, streaming services you don’t have time for – unsubscribe and free up that cash for something you actually enjoy.
(iv) Embrace Free Entertainment: Who says fun has to be expensive? Explore free museum days, check out local parks and hiking trails, or have a game night with friends at home. You’d be surprised at how many budget-friendly ways there are to entertain yourself.
(v) The “DIY or Die Trying” Approach (Okay, Maybe Not Die Trying): Sometimes, the most affordable option is to do it yourself. Instead of hiring someone to clean your house, mow your lawn, or fix a leaky faucet, consider learning some basic DIY skills. There are countless tutorials online and at your local library – and the satisfaction of conquering a project yourself is priceless (and budget-friendly!).
(vi) Utilize Cash: For some people, using cash can be a helpful budgeting tool. It allows you to see your money physically dwindling, which can make you more mindful of your spending. Try the envelope system – allocate specific amounts of cash for different categories (groceries, gas, entertainment) and stick to those limits.
Step 5: Review & Repeat! Budgeting Is A Journey, Not A Destination
Your budget isn’t set in stone. Life happens, and your spending might need to adjust. Here’s how to keep your budget on track:
(i) Review Your Budget Regularly: Set aside some time each month (maybe during your weekly meal planning session) to review your budget. See how you’re tracking against your goals and adjust as needed. Did you spend less on groceries this month? Great! Maybe you can allocate some of that extra cash towards savings or that new game you’ve been eyeing.
(ii) Be Flexible But Not Fragile: Unexpected expenses will pop up. The key is to be flexible and adjust your budget accordingly. Don’t let one setback derail your entire financial plan. Maybe you have a car repair this month, and your needs category takes a bigger bite. That’s okay! Just recommit to your budget goals and get back on track next month.
(iii) Celebrate Your Wins: Building a budget and sticking to it takes discipline and effort. Celebrate your wins, big or small! Did you manage to save your entire 20% goal this month? Awesome! Treat yourself to something small (within your budget, of course) to acknowledge your accomplishment.
Bonus Tip: Automate Your Finances
Technology can be your best friend when it comes to managing your finances. Many banks offer features like automatic transfers, which allow you to schedule regular transfers from your checking account to your savings account. This is a great way to automate your savings and ensure you’re consistently reaching your financial goals.
Conclusion
Remember: Building a budget is a journey, not a destination. There will be bumps along the road, but with dedication and these helpful tips, you can take control of your finances and achieve your financial goals. As motivational speaker Harriet Tubman once said, “Every great dream begins with a dreamer. Always remember, you have within you the strength, the patience, and the passion to reach for the stars to change the world.” Let your dream of financial freedom be your guiding star, and your budget be the map that leads you there.
Dive Deeper Into: How To Create A Budget With A Single Income?
FAQs
How to start budgeting for beginners?
Track your income and expenses to understand where your money goes. Categorize your spending, set financial goals, create a budget plan, and regularly monitor and adjust your budget.
What is the 50/20/30 rule?
Allocate 50% of your income to essential needs like housing and groceries, 20% to savings and debt repayment, and 30% to wants and discretionary spending.
What are the 5 basics to any budget?
- Income: Total earnings from all sources.
- Fixed Expenses: Regular, recurring costs such as rent and utilities.
- Variable Expenses: Expenses that change monthly, like groceries and entertainment.
- Savings: Money set aside for future needs and emergencies.
- Debt Repayment: Paying off any outstanding debts.
How do I create my own budget?
Calculate your total income, list all expenses, set spending limits for each category, track your spending to stay within limits, and review and adjust your budget as needed.
