How To Create A Budget 101

In the simplest terms, a budget is a plan for your money. And following one is essential for reaching your financial goals. Like using a map for a road trip, having a budget provides direction. It lets you decide how you’re going to spend your money before you actually spend it, giving you potential routes so you successfully arrive at your final destination.

Even if you become lost or encounter a roadblock, your budget will help you re-route and get back on course. A budget helps you get from where you are to where you want to be. And it allows you to monitor your trajectory along the way.

People may avoid budgeting because it seems too complicated, time-consuming or repressive. But budgeting doesn’t have to be a frustrating process. Nor does it have to feel restrictive. Learning how to budget in a way that makes the most sense for your lifestyle will actually help you feel more in control of your money.

Make (or reassess) your budget with these simple and effective tips to help you budget better.

Start simple — Figure out what your goals are.

The first step when creating or revisiting your budget is to determine your financial goals. You may have one goal or several. Whether you want to save for a big purchase, pay off debt, build an emergency fund – whatever your goals may be, you need to concentrate on your why. What are your reasons for budgeting?

You’ll have a hard time without a goal driving your effort. When all is said and done, goals are what give you direction in life. Without a final destination in mind, what is motivating you to stay on course? Goals elicit new behavior, guide your attention, and sustain any momentum you may have.

With your budget, goals well help you prioritize how you spend your money and focus on what’s most important to you. Your budget can give you an idea of how long it will take to reach your goals, so you can measure your progress throughout the way.

Be realistic — Know the Numbers.

Honesty is the best policy. This notorious phrase rings true with budgeting, too. You must be honest about your finances. For budgeting to work, you need to be working with the most accurate information. Plain and simple. It’s essential to know exactly how much money is coming in and exactly how much money is going out. You also need to know where it’s all going.

Compile all of your financial statements from the past three to six months to get a good idea of what you typically spend and earn. Don’t guess the numbers. Look at bank statements, investment accounts, checking accounts, credit cards, utility bills and any other relevant information concerning your income or expenses.

Identify what’s coming in:

Identify all your sources of income. Your paycheck is the most obvious source of income, but don’t neglect any bonuses or additional funds. If you have an irregular income, you should base your budget on what a low earning month looks like for you so that you have a safety cushion.

Determine what’s going out:

List of all your monthly expenses. Start with your fixed expenses. These are your consistent and expected expenses that stay the same each month. Mortgage and rent payments, cable and internet bills, car payments, streaming service subscriptions and monthly gym memberships are some examples of common fixed costs.

Next, estimate your variable expenses. These are your expenses that fluctuate from month to month. Food, clothing, gasoline, personal care items, household essentials and entertainment are all variable costs. It’s crucial to keep a close eye on your variable expenses, as it can be very easy to overlook them.

Whether you’re tracking numbers by writing everything down in a notebook, using a budgeting app, or creating spreadsheets on your computer, the important part is that you’re recording the numbers so you can clearly see and review them.

Don’t forget about your occasional expenses.

An occasional expense is ANY expense that doesn’t get paid every month. These include expenses that may be billed quarterly, semi-annually, or yearly.

Insurance premiums, membership dues, annual credit card fees, seasonal clothing, teeth cleanings, haircuts, oil changes… these are all predictable. But they can easily sneak up on you. When creating a budget, we often leave out occasional expenses because they deviate from the normal pattern of monthly payments.

The most straightforward way to budget for occasional expenses is to take a thorough inventory of all the occasional expenses you incurred last year. One-time expenses and any expense that isn’t a monthly fixed expense, like your mortgage or rent, or any expense that isn’t accounted for in your “variable expenses” category (like food, shampoo, monthly entertainment, etc.) should be deemed “occasional”.

Once you’ve got everything down, add up all of your occasional expenses and divide the sum by 12 to figure out your “monthly” budget for an occasional item. For example, if you spend $180 per year on back-to-school supplies, your monthly budget is $15 per month.

Give yourself some breathing room — build a cushion for surprises.

In a nutshell – you need a buffer in your budget because life is full of surprises, both positive and negative.

Maybe you got sick and had to pay for new medicine, cough drops and a visit to urgent care. Maybe your clothing budget was a little higher than normal because both kids outgrew their tennis shoes– or that impromptu dinner with friends made you go over your “dining out” budget. Maybe you had a broken water pipe in your basement, which caused your water bill to soar.

Whatever the reason, it’s not always practical to wait, and sometimes you have to shell out money immediately. The reality is that unexpected expenses are not uncommon. So we might as well plan for them.

Add a buffer in your budget to give yourself flexibility for when you go over on some of your spending. Think of your buffer as your monthly safety net. Each month, set aside a small amount of money for unexpected monthly expenses and dub this as your “miscellaneous” category in your budget.

The amount you have in your buffer will depend on your income, expenses and typical spending. Some people like to allocate a small percentage of their take home pay. Others may prefer to stick to a number they know works for them, like maintaining $500 or $1,000 in their miscellaneous category. It really depends on your lifestyle and what you feel comfortable with.

All in all, your buffer can help you bear the brunt of unexpected costs and keep you on track. Also, it lets you live in the moment and enjoy the spontaneous expenses that come with life.

Along with the tips above, it’s important to continually review your budget and make any adjustments as needed. The more work you put into being intentional with your money, the easier budgeting will come. Remember, budgeting does pay off!