Budgeting helps you achieve financial milestones, from building an emergency fund to saving for a down payment on a home.
While it may seem daunting, making a budget isn't that difficult. There are many budgeting apps tailored to different kinds of consumers, including investors, students and even couples. You can also download templates from Google Sheets or Microsoft Excel.
Below, we show you how to make one from scratch.
1. Calculate your net income
The first step is to find out how much money you're actually bringing in. If you receive a regular paycheck from your employer, your net take-home salary should be listed.
Since state and federal income tax and Social Security are withheld, it will be significantly smaller than your gross income. If you're enrolled in a health insurance plan, FSA, or 401(k), funds for those accounts will usually be withdrawn automatically, as well.
If you freelance, are self-employed or don't receive a regular salary, you'll need to subtract taxes from your earnings. The self-employment tax rate is 15.3%, which includes both Social Security and Medicare. This TaxAct calculator will estimate your tax liability for the year.
To get your monthly obligation, just divide by 12.
2. Compile your monthly expenses
The biggest lift in budgeting is getting an accurate accounting of your monthly expenses. They can include:
- Rent or mortgage payments
- Car payments
- Student loans
- Savings
- Insurance
- Utilities and streaming subscriptions
- Child care
- Groceries
- Transportation
- Household goods
- Dining and entertainment
- Travel
3. Label fixed and variable expenses
Once you've compiled your monthly expenses, figure out whether they're fixed or variable. Fixed expenses are predictable, like your rent, car insurance and gym membership.
Variable expenses, such as how much you spend on gas or eating out, will fluctuate from month to month. If money is tight, you can always cut back on dining out, but you'll still have to pay your mortgage.Â
For any category where your outlay isn't fixed, determine the average by looking back over the past three months of spending. If you spend an average of $433 on groceries each month, you can round up to $450.
4. Make adjustments
The last step in creating a budget is comparing your monthly expenses and your income. If the former exceeds the latter, you'll need to make some adjustments. This may include reevaluating how much you spend on variable expenses like groceries or entertainment, or eliminating some fixed costs, like a streaming service or gym membership.
On the other hand, if you have money left over, you can increase certain areas of your budget. (Don't ignore your savings.)
A budget will only work if you keep to it, so add purchases as you make them. Hold yourself accountable by setting reminders with your credit cards to alert you if you reach a predetermined amount. And it's a good idea to revisit your budget regularly to ensure monthly costs haven't crept up.
