Taking control of your personal income starts with building a strong foundational base, and that is exactly what a budget is for.
A budget gives you the ability to know where your money is going and helps you see how your sources of income are being distributed into your expenses. Thus, helping you trim off unnecessary expenses and setting realistic financial goals for yourself.
Honestly, it is super simple once you break it down.
I’ll walk you through the easiest way to build your budget using a 5-step approach.
Check our Finance Resources for an Excel Budget Template!
Step 1: Understand your Sources of Income
Okay, this section of making the budget is highly individualistic as everyone makes their income in different ways.
A good place to start is your 9-5 job, which will probably be the most stable source of income.
Next, consider your variable income. This includes everything from the money you expect to make from online sales, dividend or interest payments made to you, etc.
For budgeting purposes, it is important that you are taking taxes into account. Therefore, make sure you are building your budget around your after-tax earnings.
If you do not know what exactly your after-tax income is, you can do an approximation check here.
Step 2: Understand your Expenses
Now that you have your income all sorted out, we can move on to expenses. For simplification, let’s create 3 main buckets of expenses.
Bucket #1: Any debt or outstanding loans
Calculate what you owe from student loans, credit card debt, etc.
Although daunting, this will give you a clear picture of how much money you really are liable for currently.
Bucket #2: Your fixed monthly expenses
These expenses are the ones which will not change, or will only vary slightly from month to month. Consider these expenses to be your essential expenses. I’ll explain a few important components:
Rent/mortgage payments
This should be a pretty straightforward amount to find as you pay it every month.
Yet, if you do not yet have an apartment or a mortgage payment but plan on having one soon an old rule of thumb is that your rent should not exceed 30% of your monthly income.
Debt
Plan on making minimum payments on all your debt.
When analyzing your debt, don’t think only of your student loans, but also about your credit card payments, car financing, etc.
Medical Expenses
Think about your prescriptions of medications that you buy every month.
Buying food/groceries
According to the USDA, a family of two will spend $380-$742 a month on groceries depending if you are on a low-cost budget or on what they call a ‘liberal’ budget. The moderate budget averages around $ 614 a month per couple.
Note: If you are expecting to have a tight budget, I would recommend prioritizing your utilities before buying food and groceries. This is because utilities are a less variable expense given that you probably have a base rate in your utility contract. While you have more freedom in adjusting your grocery budget.
Utilities
Estimate how much you pay for your electricity, your water, your phone and wifi.
A good rule of thumb when estimating these, is to take a 6 to 12 month average. Most of the time, your provider will give you this average. Just check your online portals for that information.
Health Care
Think about how much you pay for your health and dental insurance. Include any other health related expenses you might have.
Insurance
Aside from your health insurance, you probably will have other insurance expenses. For example, if you own or rent property you most likely pay property insurance. Or, if you drive a car you incur a car insurance fee.
Transportation
In this section, include your car payments, as well as parking and gas expenses. Use an average for your gas expenses, as they might vary slightly from month to month.
If you do not own a car, then think about your public transportation expenses.
Other
Other fixed expenses may include pet supplies, household items, gym memberships, toiletries, etc.
Bucket #3: Your variable expenses
Variable expenses are those which we might consider being non-essentials, and the ones we target first if we need to scale back spending or increase savings.
Examples of categories include:
- Entertainment
- Dining out
- Subscriptions
- Clothing expenses
- Travel
- Beauty expenses such as hair, nails, etc.
- And miscellaneous expenses such as birthday gifts
Step 3: Create a savings goal
The amount you choose to save varies based on your future goals and preferences. Most people decide to save around 10-20% of their income every month, depending on what spending strategy they follow.
Step 4: Put it all together
Deduct fixed expenses, savings goals, and variable expenses from your income.
Ideally, you will be left with a small surplus. If your surplus is too big, consider increasing your monthly savings!
On the other hand, If you do not have enough income to cover your expenses… it is time to cut some. Go through your variable expenses, and decide which to cut. If you still need more money, consider switching service providers or finding a more affordable rent/mortgage/car payment.
Step 5: Track your spending
To better adapt your budget as time goes by, track your spending. That way you will know if you can budget less or more in a category.
A great way to do this is by using an online tool or app. This can be especially helpful if you do not want to track your expenses manually or with an excel sheet. With an app you can just connect your bank account(s) and the app will do the work for you!
Conclusion
Congratulations! You have built yourself a working budget.
Remember not to be too hard on yourself. It is ok to deviate from your budget from time to time, as long as you can balance it in the long run. After all, a budget is about finding out what works for you.
Ok, now you can go and brag about being a more financially conscious person.
Bonus!
Step 6: Aside from your budget
Now that you have all your basic expenses covered, it is advisable to start building a small emergency fund.
To start, try to keep around $1,000 or about one month’s worth of expenses in your emergency fund. It is best to keep your emergency fund money in an account you have easy access to. For example a savings or checking account.
This way you can access the emergency money when you need it without any penalties.
