How to Create a Budget (& Stick To It!)
Whether you use a spreadsheet, an app, or do it old school with paper and pen, creating a budget is a necessary first step to understanding your finances.
1. Income
How much do you make? No, not your gross income. To know how much money we’re working with, you need to know your net income. Net income is the money you have left over after taxes and benefits, like a 401(k), are taken out. This is the amount that is on your paycheck every week. Once we know how much that is, we can add up how much you make a month. For example, if Filly Finance makes $500 a week, then she makes $2,000 a month. This is how much money they have every month to pay for expenses such as rent/mortgage, gas, groceries, utilities, and more.
2. Determining fixed expenses
After knowing how much you have to work with, list out your fixed expenses. These are monthly expenses that don’t fluctuate, meaning you pay the same price, at the same time, every month. Fixed expenses are:
- Rent/mortgage payment
- Loan payments (including school, auto, and personal)
- Phone
- Internet
- Streaming subscriptions
3. Variable expenses
Variable expenses consist of goods and services that you need on a month to month basis, but cost a bit more or a bit less every month depending on how much you need/use. When you write these budget items, give yourself room to breathe. Don’t give yourself an unattainable grocery budget. This will only cause discouragement and lose the effectiveness of the budget sheet. It’s best to look back at your account to get an idea of how much you were spending. The necessary variable expenses you need to add are:
- Utilities
- Groceries
- Gas
- Dining/eating out
Now, you can add the fun stuff to your budget.
- Entertainment (video games, movies, etc.)
- Travel
- Household goods
- Clothing
- Gifts
- Gym memberships
4. See where you can save
Now, subtract your total amount of expenses (add all fixed and variable expenses together) from your net income. If you see a negative number, then you need to go back through your budget and see where you can save. Usually, you can see opportunities for savings in the variable expenses. Examples include cutting back on groceries, making a smaller dining out budget, or deleting some subscriptions.
If you’re just breaking even without any money going into your savings, consider reevaluating your budget sheet. It’s important to have savings for future you.
5. Stick to it!
A great rule of thumb is to follow the 50/30/20 strategy. Dedicate 50% of your net income to the necessities, 30% to your wants, and 20% to your savings. You can’t go wrong with budgeting like this. However, even with a fancy budget sheet, if you start to stray from it and overspend, you’ll be in the dark about your financial outlook. So make sure once you have a budget, you stick to it.
At the end of the day, the goal of a budget isn’t to make your life miserable and stop you from enjoying the things you like, it’s to focus on your financial goals and make the most of your money.