1. Gather Your Financial Paperwork
2. Review Your Income
3. Review Your Spending
4. Make a Budget
5. Set Goals
6. Create an Emergency Fund
7. Automate Savings and Payments
8. Reduce Expenses
9. Stick to the Plan

What is a budget?

If you’ve often felt that you don’t know where all your money goes, it may be time for a budget. What is a budget, exactly? Put simply, it’s a plan for how you’ll spend your money over a period of time — usually a month.

Why is a budget important?

Planning a budget will help you keep track of the money that goes in and out of your bank account and can be a useful way to help ensure you’ll always be able to pay your bills. It’ll take a little work, but the good news is that creating a budget plan can be simple.

Budget planning can help in more ways than you might think. Yes, it will help you gain control of your spending and start whittling down any debt you might have, but it will also give you the peace of mind that comes with knowing you’re on top of things. That will be especially true if you use your budget to establish an emergency fund you can tap into when you have surprise expenses or an unexpected loss of income. On top of that, a budget can help you save more and make progress toward your financial goals every month.

Here are a few budgeting tips to get you started.

1. Gather your financial statements.

Start by gathering all the information you’ll need to build a budget:

• Bank statements
• Credit card statements
• Paycheck stubs
• Monthly bills — Utilities, Childcare, Transportation Costs, Student Loans, Insurance, Groceries, Car Payments

2. Review your income.

First, list your monthly income. If you get a paycheck, write down the net amount, which is what you take home after taxes and anything else (such as insurance costs or 401k contributions) withheld by your employer.

If you’re self-employed, add up all the payments you receive in a given month, minus what you need to set aside for taxes.

If you have any other sources of income, such as a trust, money received from family members or Social Security payments, be sure to include those as well.

3. Review your spending.

You’ll then want to list out your expenses and put each one into one of two categories, fixed or variable.

Fixed Expenses List

Fixed expenses are costs that you’ll know you have to pay every month, and that stay the same every time, such as:

• Mortgage or rent payment
• Car payment
• Streaming services
• Utilities
• Student Loans

Variable Expenses List

All other costs will go into your list of variable expenses. Variable expenses are those that are usually different every month. You can further break down this category into essential variable expenses and non-essential variable expenses.

Essential variable expenses may include utilities like your electric bill, groceries, gas or minimum payments on credit cards.

Non-essential variable expenses are your optional expenditures, like concert tickets, nights out with friends or nail care.

Note that certain items might fall into both kinds of variable expenses. Clothing is a good example. Clothing is a need, so you’ll want to set aside money for it each month. But a pair of expensive shoes or a designer jacket could be considered non-essential. Use your best judgment around which category is most applicable for each expenditure.

Annual Expenses

Make sure you don’t overlook expenses you pay annually, biannually or quarterly, such as car insurance payments, water bills or subscriptions. The best way to track these is to divide them into equal portions that you enter into your monthly budget. For example, if you pay $432 every six months for car insurance, create a $72 line item ($432 divided by 6) for it in your monthly budget.

4. Make a budget.

Budgeting Methods

Once you have your income and expenses in hand, the next step is to decide what kind of budget you want to build. Popular approaches include the 50/30/20 budget, the envelope system and zero-based budgeting, so let’s take a look at each.

• The 50/30/20 budget is fairly simple. It dictates that you allocate 50 percent of your after-tax income to your needs and obligations, 30 percent on your wants, and 20 percent to savings — or to paying down debt, which you may want to prioritize if it’s high-interest debt. The “wants” bucket should include anything that’s truly optional and that you could live without if you chose. The real benefit of the 50/30/20 rule is the focus on saving 20 percent of your income. This approach can help you become much more financially resilient over time.
• The envelope system involves identifying the various categories of expenditures you expect to spend on and labeling an envelope with each one. For example, you might create one envelope for groceries, one for debt payoff, one for going out to eat, and so on. You then divide up your income into each of the envelopes as you see fit — you could even use the 50/30/20 rule when deciding how to divvy up your income. It’s up to you. However, once you’ve spent the money in any given envelope, that’s it — you can’t spend any more on that category until a new month starts. The original version of this system used literal envelopes and putting cash in each one. You can take that approach if you want, but today you can do this with apps or spreadsheets, or you can create a bank account for each category and allocate money to each one every month.
• Zero-based budgeting requires you to allocate every dollar of your income to a either an expense , to savings or to a debt payment. The idea is that by the end of the month, your income minus your expenditures equals zero. You are in charge of which categories you assign money to, and in what amounts, and you can switch things up each month if you like. The goal is to give you control, so that you’ve made your spending decisions ahead of time and therefore avoid overspending and impulse buying.

While you can manage any type of budget with pen and paper or an Excel template, there are plenty of apps out there — Mint, You Need a Budget and PocketGuard are a few of the most popular — with built-in budgeting tools to help you create and track your budget, and many of them are free. Or you can use a spreadsheet you create yourself to track everything. If you aren’t sure which approach you’d prefer, try a few of them and see which one suits you best.

5. Set goals.

One of the main benefits of establishing a budget is that it can help you reach long- and short-term financial goals and give you a sense of how long it will take you to achieve them.

Budget for Credit Card Debt – Paying off credit card debt is one of the best places to start when you’re setting up a budget for the first time. If possible, pay off the balance or more than just the minimum each month — doing so will help you avoid the interest that may really add up on you. If you have high interest rates on some of your cards, consider opening a new account that can offer you a lower rate, or even a zero-percent introductory rate.

Budget for Student Loan Debt – While interest rates on student loans are usually low, they can still be a significant part of your budget. You may have some options available to you that can make paying off student loans a little easier. The type of loan you have may also make a difference. If you can, build a little extra into your budget to pay a bit of extra principal each month.

Budget for Paying Down your Mortgage – If you own a home, your mortgage will be one of your biggest expenses every month and will be where your monthly budget needs to start. If you’re able, it can help in the long run to pay extra on your principal each month. You may also be able to lower your monthly payment by refinancing, so it’s usually worth looking into when rates get low.

Budget for Homeownership – Owning a home costs more than just the monthly mortgage payment. The true cost of home ownership includes utilities, repairs, yard maintenance costs, property taxes and more. Be sure to account for all of these elements in your budget and establish a fund to help cover costs of surprise repairs. If you’re currently renting and thinking about buying, do some homework and determine how much house you can afford to help you stay within your budget.

Budget for College – Whether you’re saving for your own education or a child’s, the sooner you get started, the better. Make a game plan so you can build the costs into your budget now. Understand what your options are in case you need to consider student loans, and be sure your plans will allow you to pay for college responsibly.

Budget for Home Improvements – One of the best ways to add value to your house is through home improvement projects. Since these can be costly, saving a little bit each month may take a while. If you have equity in your home, however, you can look into getting a home equity loan or home equity line of credit to help you do improvements sooner. Study up on the differences between the two so you fully understand your options.

Budget for Baby – Planning on starting a family? Just keep in mind that your bundle of joy will definitely require some adjustments to your budget. Be prepared for these changes ahead of time so that when the baby arrives, your only worry will be about when you’re going to get some sleep.

Budget for Wedding – Whether you’re dreaming of a big wedding (once the coronavirus crisis has passed, that is) or planning on keeping things intimate, you’ll need to make some financial preparations. Have a conversation with your partner, and don’t forget to build in the cost of that dream honeymoon into your budget.

Budget for Buying a Car – When planning for a car purchase, keep in mind that you won’t just be taking on a car payment. There’s also the cost of insurance, maintenance and possibly taxes, depending on where you live. It will also help if you know what your financing options are and do your homework about auto loans before you go to the dealership.

6. Create an emergency fund

In addition to saving for specific purposes, it’s ideal to set some money aside each month for emergencies. The Federal Reserve has found that nearly 40% of Americans aren’t able to cover a $400 emergency expense. You don’t want to risk the possibility of finding yourself in that position, so prioritize this emergency fund if you can. Though it appears that there may be an end in sight for the COVID-19 crisis, there’s enough uncertainty to warrant being prepared for the unexpected. And if you have to use some of your emergency fund for an unanticipated expense, replenish it as soon as you’re able.

7. Automate savings and payments

Set Up Separate Accounts

You may want to set up a savings account for your vacation fund or emergency reserves so you don’t see that money in your main checking account. This approach can help you avoid impulsively spending what you’re intending to save.

Automatic Transfers to Savings

To take things a step further, set up an automatic transfer of funds to your savings account each month so you don’t even have to think about it. This not only gives you one less thing to worry about, but it also will help ensure that you actually do save money every month.

Automatic Bill Pay

Speaking of automation, it’s a good idea to set up as many of your bill payments as possible to be automatic each month. It will lessen your budgeting burden and ensure that your important obligations are met without needing to lift a finger. The more payments you can just set and forget, the easier it is to stay on top of your budget.

Set Up Alerts

Automated alerts via email or text can not only help you against potential account fraud, but also help you stick to your budget. Alerts that tell you when your balance is above or below a certain level, if your account is overdrawn or if there’s suspicious activity on your account are good places to start. Most credit cards also offer the ability to receive an alert any time a charge is made on them. Take a look at your bank’s mobile app to see what other features it has that can help you stay informed and on track.

8. Reduce expenses.

As you work through the process of planning a budget, you may start to realize that your expenses are higher than you can comfortably afford. If so, it’s time to think about finding ways to reduce those expenses. This could be as simple as lowering the number of streaming services you subscribe to or dining at restaurants less frequently. If the budget gap is big enough, you may need to consider more significant changes, such as finding a more affordable place to live or finding a car with a lower monthly payment.

9. Stick to the plan.

Perhaps the most important aspect of making a budget is actually sticking to it. Stay disciplined and avoid any spending that doesn’t fit within the guidelines you’ve set out for yourself. If you’ve never lived by a budget previously, it may take a bit of getting used to. But before long, it’ll become second nature. As you go forward, take the time to review your budget and adjust it as needed. The goal is to find a budget approach you can feel comfortable with — and it’s entirely in your control to decide.

The best part about establishing a budget is that you’ll start to enjoy the results of your work right away. Being in control of your money can be a tremendous stress reliever. And as you start to reach some of your financial goals, pay down debt and establish a healthy emergency fund, you’ll not only have peace of mind, but a real sense of accomplishment.

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Also See

• How to Take Control of Your Debt to Achieve Your Goals
• Financial Documents: What to Keep and When to Toss