4 Easy Steps To Creating Your First Budget

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first budgetI 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?

Comments

  1. says

    Great tips! When I created my first budget, I had zero room for error. I also accounted for regular expenses only, so when my car insurance or another expense that only comes every few months popped up, I was unpleasantly surprised. I have since learned to take into account irregular expenses and built in a buffer so that I don’t feel like a failure when something unexpected happens.

  2. says

    In all honesty I wish I had started to track my income and expenses sooner. I started about three years ago, which sounds like a lot, but I wish we had gone into our marriage ~4 years ago already in the habit. It’s nearly impossible to make adjustments to your spending if you don’t know where it’s going.

  3. says

    I’ve never created a budget. I just track my spending very closely and make sure no ‘category’ ever gets out of hand.

    I do wish I had gotten a credit card earlier. Those rewards are handy and my credit score would be higher right now.

  4. says

    The big one is to track and adjust your budget. The reason you have a budget is so that you can see where your money is going and make appropriate adjustments to stay on your financial plan. A lot of times people fail to make the necessary adjustments once they see where they overspend.

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