I have often tried to make sure that I stay in the blue so to speak. What this means is I try to ensure that I spend only what I have and never what I don’t to avoid going over budget and eventually into debt. In this guide on how to create a budget that actually works we walk through the various steps required to create a good budget.
I created an easy template to follow that is FREE. Please subscribe and the template will be included in my welcome email to you! Follow the steps that I have outlined below to fill in the template and see if you can start tracking your money better. A budget will give you peace of mind and confidence that you are taking care of your financial well being.
Table of Contents
Why You Should Have a Budget
Budgets are like guard rails. They prevent us from going over financial cliffs. When you seat down to create a budget you start to think about your money more intentionally. Your income becomes like a beam that provides direction for what you should do with your money. You also start to prioritize how you spend your hard earned money.
In the process of creating a budget it becomes very clear where your money goes and for some of us it can be an eye opener. Budgets help us to see where we can cut back on things that we don’t need and where we have an opportunity to be more frugal. They also show us how much debt we have in comparison to our income and they can lead to financial freedom when we become better managers of our money.
Without a budget I feel like I would be in a free fall financially with no idea of what I am doing with my money. With that comes overdrafts and fees that we should never have to pay. It also leads to debt because we don’t analyze our finances as much as we should. That is why I recommend creating a budget and following it if financial freedom is a goal.
How to Create a Budget
In the next five steps I will provide a guideline that you can follow in creating a budget that you understand and can manage. There is no point of having a budget that you cannot control because you will fail.
You can use various styles to create a budget where you can have a traditional budget. This is where you simply have total income and total expenses and whatever is left over goes to your savings. This style is more rudimentary and I don’t recommend it. My template provides a more concise way of budgeting and more clarity into exactly what you are budgeting for.
There is another style called the reverse budget. In this style you focus on saving money first before spending. You would set a goal for how much you want to save and then whatever is left is your spending money. Honestly I don’t understand how this works unless you have a high income where your living expenses are not a huge portion of your income. While I think it’s important to save I think there is an easier way to go about it.
Lastly you could also use a 50-30-20 budget and it’s one of the more popular styles. With this method you assume that 50% of your income goes towards paying for household expenses. 30% is allocated to the things you want that you don’t have an obligation to pay for and 20% is for your savings.
I recommend using a blend of all the above. Start by building on a traditional budget which most people are doing now. Then ask yourself what financial goals you have in mind. If saving is a high priority then set a percentage or amount that you want to save from your income. Lastly focus on analysing where you spend your money both for living expenses and other things that you buy for comfort.
This will give you a pretty good idea of how much and what you spend your money on. It will show you areas for improvement and opportunities to save more.
Five Steps to Create a Budget
1. Start with income.
The questionS that I ask myself is how much money do I make and when do I get I paid. If you are a couple that comingles their money combine your incomes. The best place to start is at net pay. Net pay should be your after tax income including retirement savings. In my budget template I am assuming that you already contribute to your retirement account through your job if you are employed. I am also assuming that you get healthcare through your job. If you don’t include the expense in the expense line.
I like to do this biweekly because I get paid every other week. This makes it easier to track my income and expenses by due date as you’ll see on the template.
As you consider what you make also find ways that you can make more money. In this post I highlight several ways that you can make extra money even while you sleep.
2. Next is fixed expenses.
What must you pay for? Rent, mortgage, car payment, car insurance, phone bill, gas, student loans, electricity etc. Anything that must be paid for goes on this list. Split this list by due date so that you have a bi-weekly expense to be covered by your biweekly income. In addition to spreadsheets there are journals that you cans use to track how much you spend on a daily, weekly or monthly basis. This can be used as budget templates as well.
Budgeting on a biweekly basis is more manageable than budgeting by month. It also allows for some flexibility in case something unplanned happens. Did you know that you can change the due dates on most bills? You just need to make a call to customer service and if you have a good record they will sort you out. Bill paying should fit when you earn your money.
3. Variable essential expenses
Next is the essential stuff that could vary. This is usually your groceries, fuel costs, school materials etc basically things you have a rough estimate of. They are usually not a standard expense that you know but you can roughly estimate based on your household and experience. I normally put a rounded up number for this stuff to make sure that I don’t miss anything.
4. How much are you saving
After this you need to determine how much of your income is a savings spend. Yes! You must make saving a fixed expense in your life. So out of your biweekly income how much goes to your savings account. Fill that in. This should be non-negotiable because life can throw you curveballs and you should be equipped to deal with them.
The best way to do this is to either have it go straight out of your paycheck to your savings account or setup a transfer schedule on your bank account. That way you never touch it in your regular checking account. I set this up a few years ago and it took discipline not to even think of that money as my spending money but seeing the balance grow is a great motivator.
5. Nice to have
Now that you have an outline that you can work with you can add the ‘nice to have list. This will change from month to month when vacations, shopping for new clothes, gadgets, upgrades, entertainment, holidays and things that are not ordinary come up.
You should now be able to see where you fall in terms of your income and spend. You may have opportunities to save more and opportunities to cut back as you understand your money more.
Watch the video below on how to create a budget.
If you are interested in a template that goes through each of these steps on how to create a budget please subscribe and I will send one along.
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