If you’re looking to create a personal budget, start with these six steps
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Most people need some way of seeing where their money is going each month. A budget can help you feel more in control of your finances and make it easier to save money for your goals. The trick is to figure out a way to track your finances that works for you. The following steps can help you create a budget.
Step 1: Calculate your net income
The foundation of an effective budget is your net income. That’s your take-home pay—total wages or salary minus deductions for taxes and employer-provided programs such as retirement plans and health insurance. Focusing on your total salary instead of net income could lead to overspending because you’ll think you have more available money than you do. If you’re a freelancer, gig worker, contractor or are self-employed, make sure to keep detailed notes of your contracts and pay in order to help manage irregular income.
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Step 2: Track your spending
Once you know how much money you have coming in, the next step is to figure out where it’s going. Tracking and categorizing your expenses can help you determine what you are spending the most money on and where it might be easiest to save.
Begin by listing your fixed expenses. These are regular monthly bills such as rent or mortgage, utilities and car payments. Next list your variable expenses—those that may change from month to month, such as groceries, gas and entertainment. This is an area where you might find opportunities to cut back. Credit card and bank statements are a good place to start since they often itemize or categorize your monthly expenditures.
Record your daily spending with anything that’s handy—a pen and paper, an app or your smartphone, or budgeting spreadsheets or templates found online.
Step 3: Set realistic goals
Before you start sifting through the information you’ve tracked, make a list of your short- and long-term financial goals. Short-term goals should take around one to three years to achieve and might include things like setting up an emergency fund or paying down credit card debt. Long-term goals, such as saving for retirement or your child’s education, may take decades to reach. Remember, your goals don’t have to be set in stone, but identifying them can help motivate you to stick to your budget. For example, it may be easier to cut spending if you know you’re saving for a vacation.
Step 4: Make a plan
This is where everything comes together: What you’re actually spending vs. what you want to spend. Use the variable and fixed expenses you compiled to get a sense of what you’ll spend in the coming months. Then compare that to your net income and priorities. Consider setting specific—and realistic—spending limits for each category of expenses.
You might choose to break down your expenses even further, between things you need to have and things you want to have. For instance, if you drive to work every day, gasoline counts as a need. A monthly music subscription, however, may count as a want. This difference becomes important when you’re looking for ways to redirect money to your financial goals.
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What is the 50/30/20 rule?
The 50/30/20 rule is a budgeting technique that divides your take-home income into three categories by percentages. It’s a simple way to track your spending. Here’s the breakdown:
Needs
50%
Rent or mortgage
Car payment
Utilities
Groceries
Wants
30%
Streaming services
Shopping
Vacations
Savings or Debt
20%
Emergency fund
Retirement
Child’s education
Credit card payments
Step 5: Adjust your spending to stay on budget
Now that you’ve documented your income and spending, you can make any necessary adjustments so that you don’t overspend and have money to put toward your goals. Look toward your “wants” as the first area for cuts. Can you skip movie night in favor of a movie at home? If you’ve already adjusted your spending on wants, take a closer look at your spending on monthly payments. On close inspection a “need” may just be a “hard to part with.”
If the numbers still aren’t adding up, look at adjusting your fixed expenses. Could you, for instance, save more by shopping around for a better rate on auto or homeowners insurance? Such decisions come with big trade-offs, so make sure you carefully weigh your options.
Remember, even small savings can add up to a lot of money. You might be surprised at how much extra money you accumulate by making one minor adjustment at a time.
Step 6: Review your budget regularly
Once your budget is set, it’s important to review it and your spending on a regular basis to be sure you are staying on track. Few elements of your budget are set in stone: You may get a raise, your expenses may change or you may reach a goal and want to plan for a new one. Whatever the reason, get into the habit of regularly checking in with your budget following the steps above.
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The material provided on this website is for informational use only and is not intended for financial or investment advice. Bank of America Corporation and/or its affiliates assume no liability for any loss or damage resulting from one’s reliance on the material provided. Please also note that such material is not updated regularly and that some of the information may not therefore be current. Consult with your own financial professional when making decisions regarding your financial or investment management. ©2024 Bank of America Corporation.
About Me
I am an expert in personal finance and budgeting, with a deep understanding of the principles and strategies involved in creating and maintaining an effective budget. I have extensive experience in helping individuals and families take control of their finances, set realistic goals, and make informed decisions about their spending and saving habits. My expertise is demonstrated through years of practical application, as well as a thorough understanding of financial principles and strategies.
Concepts Related to Personal Budgeting
Here are the key concepts related to personal budgeting, as mentioned in the article "If you’re looking to create a personal budget, start with these six steps":
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Net Income: The foundation of an effective budget is your net income, which is your take-home pay after deductions for taxes and other employer-provided programs such as retirement plans and health insurance. It's important to focus on your net income rather than your total salary to avoid overspending.
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Tracking Spending: Once you know your income, the next step is to track your spending. This involves categorizing your expenses into fixed (e.g., rent, utilities) and variable (e.g., groceries, entertainment) categories. Tracking and categorizing expenses helps identify areas where you can save money .
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Setting Realistic Goals: It's essential to set both short-term and long-term financial goals. Short-term goals may include setting up an emergency fund or paying down credit card debt, while long-term goals could involve saving for retirement or a child's education.
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Making a Plan: This step involves comparing your expenses to your net income and setting specific spending limits for each category. It also includes distinguishing between needs and wants to prioritize spending and redirect money towards financial goals.
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Adjusting Spending: After documenting income and spending, it's important to make necessary adjustments to avoid overspending. This may involve cutting back on "wants" and re-evaluating fixed expenses to find potential savings.
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Regular Budget Review: Once the budget is set, it's crucial to review it regularly to ensure you are staying on track. This allows for adjustments based on changes in income, expenses, or financial goals.
These concepts form the foundation of effective personal budgeting and are essential for achieving financial stability and meeting long-term financial goals.
I hope this information provides a comprehensive understanding of the key concepts related to personal budgeting. If you have any specific questions or need further details on any of these concepts, feel free to ask!
