I remember the first time I attempted to create a budget. This was a few years back and I was still confused about what exactly a budget was. But hey, if everyone was doing, shouldn’t I? Needless to say, my first budget wasn’t successful and I’ve since gone through countless iterations.
Creating a budget can be overwhelming, especially if you’re young and still trying to figure out what to do with your money. To start, don’t try to do too much. Forget the gigantic spreadsheets and maze of numbers. Your first budget should be effective, yet simple. Take a look at these 4 easy steps (plus one important pre-step) to creating a successful first budget.
“Pre-step” : Know how much income you make
Before you attempt to create a budget, you need to understand how much income you have coming in. Surprisingly, many people don’t know this number. What is your gross and net income? Do you have any side jobs? Do you foresee any drastic changes to your income in the near future? Understanding your income number in totality is very important. Otherwise, your budget just won’t work.
Step 1: Define your fixed expenses
Next, you need to define your fixed expenses. These are expenses that are the same month-over-month, such as your rent, car payment, and cell phone bill. Since these expenses don’t change, it should be easy to calculate this number. Your fixed expenses will take up most of your budget, normally around 50%.
Step 2: Understand your variable expenses
After you have added up your fixed expenses, you need to understand your variable expenses. These are expenses that can change month-over-money, such as entertainment and food. Many variable expenses are considered discretionary, unlike fixed expenses. This gives your some flexibility in your budget. You may need to find ways to lower your variable expenses, depending on how much income you have. If your fixed and variable expenses added together exceed your income, you need to either cut back or add additional sources of income.
Step 3: Set your savings goals
After you have determined all your expenses, you should ideally have money left over for savings. In some cases, you may want to determine your savings goal first, and then tailor your variable expenses to meet this goal. It just depends on what your objective is. Putting 20% of your gross income into savings is generally a healthy number. But anything saved is a good thing. To make things easy, create a automatic transfer from your checking account to your savings account each month. This way, you won’t even have to think about it.
Step 4: Track (& adjust) your budget
Last but certainly not least, you’ll need to track and adjust your budget on an ongoing basis. This is the most important step. Look at your spending habits month over month. Are you going over-budget? Are there certain categories you need to adjust? Are you saving enough? Budgets are not set in stone once you create them. Figure out what works for you and revise your budget accordingly.
What are some things you wish you knew when you created your first budget?