How to Create a Budget in 5 Simple Steps: Budgeting 101 – You can find comfort and increased confidence in your ability to manage your finances by making a budget. To take control of your finances and help you realize more of your financial goals, all you need is a simple budget.
- Introduction to Budgeting: What Is a Budget?
- Five Practical Steps for Making a Budget
- Budgeting Breakdown for Beginners
- 50/30/20 Budget Calculator
- Choosing a Budgeting Tool That Suits Your Lifestyle.
- Common Budgeting Obstacles and Mistakes
- Key Takeaways; budgeting 101
Introduction to Budgeting: What Is a Budget?
A budget is a financial plan created to track and direct your earnings and expenses over a specific time frame, such as a month, quarter, or year. You can monitor your income in relation to your expenditure and savings by having a basic understanding of budgeting.
I want a budget because… Making a budget, according to Consumer.gov, can assist you in figuring out your spending strategy and, in turn, show you where you should set spending limits and what you can afford to spend more money on.
You can keep track of your budget in a variety of methods, including using a spreadsheet, paper, and a pen, or by using a budgeting software.
This post is for you if you’re new to handling your own money, have never learned how to budget, or are sick of living paycheck to paycheck. We’ll go over some fundamentals of budgeting, demonstrate how to make a budget, show you how to avoid common budget-related blunders, and eventually provide you a budget calculator and some budgeting advice so you can make a budget that works well for your lifestyle.
You urgently need to learn how to make a budget. Read the entire article for a thorough introduction to budgeting.
Five Practical Steps for Making a Budget.
You’ll need a few essential pieces of information to design your budget. With these fundamental elements, you’ll have a budget basis that you may adjust as the months pass and your financial situation changes. Let’s go over step-by-step budget creation to help you get closer to your financial objectives.
- Determine your monthly take-home pay after taxes.
A great budget is built on a solid foundation of monthly income accuracy. It’s difficult to allocate money for savings, spending, and paying off debts if you don’t know how much money is actually in your pocket. However, figuring out your monthly revenue requires a little more work than simply looking at your pay stubs.
You’ll need to perform some basic math to determine how much money you actually make; don’t worry, we’ll guide you through the process.
determining your salary’s monthly take-home pay
Knowing exactly what to expect on your paycheck month in and month out is one benefit of working as a salaried employee, and this pay structure will be an added bonus when you’re creating a monthly budget. You only need to divide your annual salary by 12 to determine your pre-tax monthly income as a salaried worker.
Once you’ve calculated your gross monthly income, you’ll need to subtract taxes and any other costs that could reduce your pay, like medical insurance and retirement plan payments from your company. In a moment, we’ll show you how to estimate this amount, but first, we’ll go through how hourly workers might determine their monthly income.
estimating your monthly salary as an hourly worker
If you work hourly, your monthly income may not always be as steady as you’d like it to be, but with the right budgeting strategy, you can surely create a spending plan that makes the most of your money each month and moves you closer to achieving your longer-term financial objectives. As an hourly worker, you can calculate your monthly salary as follows:
Let’s look at an illustration:
Keith works a 40-hour work week at an hourly rate of $15, making a gross weekly income of $600. In order to account for the weeks he intends to work during the year, Keith doubles this number by 50. (minus his two-week vacation). He divides the result by 12 and determines that his monthly gross income is $2,500.
He must now deduct these from his gross monthly income in order to have an accurate picture from which to create his monthly budget because this amount does not account for the deductions that can affect his take-home pay.
Subtract your monthly gross income from taxes and any deductions.
You must deduct taxes and other expenses from your income in order to determine your monthly take-home pay with the greatest degree of accuracy.
Federal Taxes: Review your previously computed annual gross income to determine your monthly federal tax obligation. The percentage of your income that will be used to pay federal income taxes can then be calculated by comparing your income to the tax rates. Once you have this figure, divide it by twelve to get an idea of your monthly tax obligations.
State Taxes: Although you’ll need to take note of your state’s income tax rates this time, calculating your state income taxes is practically the same as determining your federal tax liability. Calculate your monthly tax obligation by multiplying your annual income by your tax rate, then dividing the result by twelve.
Medicare and Social Security taxes: The IRS lists the following as the federal FICA withholding rates:
Social Security: -6.2%
Misc: -1.45% You might have other deductions to take into account when figuring up your monthly take-home pay, depending on your financial circumstances. You can estimate how much money will be withheld to cover 401k contributions, benefits, etc. by referring to recent paychecks.
- List both fixed and variable costs.
It’s time to assess how you’re spending it—or how you should be spending it—once you have a clear picture of how much money you truly have available each month. The two primary categories of expenses you must take into consideration as you create your budget are fixed and variable expenses. The distinction between the two is that while variable expenses fluctuate, fixed expenses typically cost you the same amount each month.
Fixed costs
Your fixed expenses, such as rent, food, transportation, and medical bills, are likely to consume a sizable portion of your budget, making them even more crucial to monitor throughout the course of the month.
Make a note of all of your usual spending to start before calculating how much of your budget is going toward fixed costs. To assist you, the following list of typical fixed expenses is provided:
- Mortgage
- auto loans
- education loans
- Rent
Once you’ve created a comprehensive list, figure out an approximate monthly cost for each item so you can determine how much of your money should go toward it. Review prior bills and credit card statements to discover what you’ve spent previously if you’re unsure of how much something costs.
Variable costs
Whether you use a shopping app, go on a weekly date, or belong to a gym, be sure to factor these expenses into your budget. These ancillary expenses, as opposed to fixed expenses, which generally have the same amount each month, might fluctuate.
Variable budget expenses include, for instance:
- Entertainment
- Groceries
- Gas
- Clothes
- Dating
- Ride-sharing
- Services
- Utilities
- Eating out
It can be challenging to estimate how much you spend each month on variable living expenditures because they are frequently inconsistent, but it’s crucial to acquire a good estimate so you can decide whether you can continue to spend as you now do or if you need to make some cuts. You may estimate your variable spending using your monthly bank statements, and then you can establish caps for each area.
How to account for costs in your budget
Simply enter the figures for these fixed costs into your budgeting spreadsheet if you’re using one of our free budgeting templates to help you plan out your monthly financial strategy. You may simply identify recurrent expenses by connecting your bank account to the Mint app, or you can set your own budget for fixed expenses.
- Establish objectives for debt repayment and saving.
As you saw in step two, you should set aside some of your monthly spending to pay off any credit card and student loan balances you may have. Set aside a specific sum each month for these payments. You’ll pay less interest overall and go closer to achieving your bigger financial goals if you pay off loans sooner.
Think about the following debts while calculating your personal budget:
education loans
Charge-card debt
Mortgage obligations
Car loans
commercial loans
Individual loans
It’s good to set realistic goals and then divide them down into manageable, bite-sized chunks if you’re all caught up on your payments but want to save money for retirement or a new automobile. Finding it difficult to develop meaningful, achievable financial goals? Look at these examples, both short-term and long-term:
aims for short-term finances
Put aside enough cash for a forthcoming trip.
Create an emergency fund.
Do some repairs to your house or car.
Set aside money to purchase holiday gifts
Clear your credit card debt
Save enough money to live independently.
enduring financial objectives
To create a retirement account, create a retirement budget.
Pay off your home or credit card debt.
Create your own company.
In the budgeting part of the Mint app, you can create personalized savings goals. Just include a budget, specify a monetary amount, and keep track of your accomplishments.
- Keep a spending log
When the cashier announces your total at the checkout, you swipe your card, and by the time you’re carrying your stuff into your car, you realize you didn’t even register the total amount you spent, you know the feeling. Although it is a worrying out-of-body experience, we have all had it.
This is why keeping tabs on your spending is so crucial. It’s simple to lose track of how much money you’re spending and let revolving debt take control of your budget. You can select the technique of keeping track of your expenditures that best suits your lifestyle depending on the budgeting approach you select—budgeting app, pen and paper, or internet budgeting tool.
Here are some pointers to help you track expenses quicker and more effectively:
Ditch the Cash: If you have problems tracking your monthly spending, stick to card payments. In this method, you can easily keep an eye on your expenditure by referring to your online bank statements.
Before you wreck yourself, check yourself: Make it a point to review your spending patterns every week. Check your expenditures to see if you’re on budget or if you need to cut back for the remainder of your budgeting cycle by gathering any receipts or statements you have. Making a budget will enable you to keep track of your expenditures and continue to live within your means.
Old-School it up: A pen and a checking book will work just fine if you’d prefer to forgo technology and adopt a more tactile approach to budgeting. Just remember to get in the habit of entering your expenses right away after you swipe your card.
Try the New-School Approach: Automated expense tracking might be a better option if you can’t be bothered to take out a pen and piece of paper every time you pay at the register. You can easily track your spending and look at transaction patterns by connecting your bank account to the Mint app.
- Monitor, review, and edit the progress of your budget.
A major financial accomplishment is developing a simple budget. It enables you to make sure you can pay your bills and pursue exciting goals like purchasing a home or paying off your education loans. Adjust your budget as necessary as you go along. It’s crucial to make sure your budget continues to serve you and your future since your income, expenses, or way of life may change.
Establish a budget schedule and make it a point to review your budget frequently—every week, every month, or at the very least every quarter—to check for any significant adjustments or milestones. This will not only make it easier for you to acknowledge and appreciate your achievements, but it will also motivate you to review and adjust your strategy as necessary.
Budgeting Breakdown for Beginners
Now that you know how to create a budget, let’s talk about budgeting best practices and fundamentals to make sure your plan fits your finances and lifestyle.
How to Pick a Budgeting Method that Suits You
The issue about budgeting is this. There isn’t really a one-size-fits-all strategy that is effective for everyone. One budgeting strategy may be better for you than another depending on your spending patterns, financial objectives, way of life, and overall connection with money. Let’s look at some budgeting strategies you can use.
Use the envelope method to keep track of transactions.
The envelope system is a straightforward method of budgeting that encourages using cash rather than card.
Put $100, your allotted budget for eating out, into an envelope. You have to wait till the next month to eat out again after the money is gone.
Put $200 in a “grocery” envelope if your grocery budget is $200. You’ll need to return something if your total at the register is $203 or above.
You can manage your budget more strictly using the envelope method. The pockets of cash serve as a visible and material reminder of the amount of money you’re allocating to each aspect of your life.
50/30/20 Budget Calculator
adhere to the 50/30/20 guideline.
The 50/30/20 rule is advised by financial experts as a fundamental financial plan, particularly for young professionals. The new 50 30 20 budget calculator can also be used to assist in developing your new spending plan.
According to the guideline, you should divide your revenue into the following groups by 50%, 30%, and 20%:
Basics: 50%
-Rent/Mortgage
Utility bills and debt repayment
-Bills
-Groceries
30% of expenses are personal.
-A date night out -Entertainment -Dining out -Shopping for frivolous goods
Discount: 20%
-Rainy day fund -Travel fund -Retirement account -Emergency savings
Calculator for 50/30/20
Choosing a Budgeting Tool That Suits Your Lifestyle.
As we’ve previously indicated, when it comes to personal budgeting, the one-size-fits-all approach is unacceptable. Whether we’re talking about your income, expenses, or financial goals, your financial position is entirely unique to you, so it only makes sense to customize your budgeting plan to your personal preferences.
You can use the following advice to pick a budgeting tool that is appropriate for you:
Check out the reviews or ask around: Even though talking about money is sometimes frowned upon, you shouldn’t avoid discussing budgeting strategies with your friends or in your romantic relationship. After all, you most likely put more faith in their judgment than in anybody else’s. Ask them about the tools they use and the aspects of their current budgeting process that they enjoy and dislike.
Examine it: Try out the free trial of any paid budgeting subscriptions before making a purchase. You can then become familiar with the features and choose whether you want to keep using the program.
Think about compatibility: Make sure the budgeting tool you intend to use can be integrated with your bank and credit card issuers if you want to automate your cost tracking.
Use a tool or template that is suited to your needs: Depending on your financial situation, you might require a basic budget or one that is tailored to your particular sources of income and outgoing costs. Or perhaps you’ll require extra features like investing capabilities or peer-to-peer transaction support. A recent survey found that 85% of consumers either use banking applications or online banking services.
When choosing a tool for budgeting, think about how you’ll use it and how it fits into your lifestyle and financial objectives. The following categories are included in our budget templates:
Family spending plan
family spending plan
a student’s budget.
Common Budgeting Obstacles and Mistakes
Common Budgeting Challenges and Errors
It’s time to discuss some of the challenges you can face before setting out on your quest for improved budgeting. Like most things in life (or the sea in this case), budgeting occasionally involves challenging or unclear decisions. Budgeting for erratic one-time costs or figuring out a part-time job can be challenging, but we assure you that your journey can (and must) go on. Here are some guidelines to help you create the most accurate budget, regardless matter the situation.
- Calculating erratic income
If you freelance or have a side business, you probably have an erratic and unpredictable income. It’s important to estimate a conservative (low) amount in these situations to avoid going over budget. Review your revenue from the last three to six months and look for any patterns. Can you determine a rough hourly or weekly rate for the money you bring in? In order to anticipate your monthly tip outs while you’re new to a career, such being a server, ask a coworker how much they regularly make in tips. Do your best to estimate your revenue, keeping in mind that you can adjust it as you go. - Covering unforeseen costs
Unfortunately, everyone experiences mishaps and unforeseen expenses. Having a backup emergency budget can assist save costs. Emergencies can be expensive, from car troubles to job loss and medical expenses. Unexpected expenses can make our budget unmanageable and put you behind. Try to include the cost of the occurrence in your budget while paying your other expenditures if it does happen. For instance, you could want to reduce the amount of time you spend eating out each month or take on an extra shift to assist you pay a payment. Create an emergency reserve in your budget if you can to protect your finances from potential unforeseen events.
Find out more about creating an emergency savings account so that you can be ready.
- Ignoring one-time costs
Budgets sometimes overlook things like vacations, annual memberships, and gifts for loved ones. If you can, set aside a little sum of money each month to cover these additional costs. The anticipated costs for the year can be estimated, and you can include them in your monthly budget. For instance, if you regularly spend $300 on Christmas gifts, budget an additional $25 per month to cover these extra costs. By the time December rolls around, you’ll have the money to buy presents.
Key Takeaways; budgeting 101
- Creating a budget is really as simple as following these five steps:
- Calculating your take-home pay
- Estimating your expenses
- Setting savings and debt payoff goals
- Recording your spending
- Tracking your progress
- To find the right budgeting method and tools for you, consider compatibility, ask around, and try out different options
- Avoid budgeting pitfalls by preparing for unexpected circumstances and tailoring your budgeting strategy as needed
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