If you've never followed a budget before, you're not alone. Most Americans don't have a personal budget in place despite the fact that it's one of the easiest ways to track your spending and help you meet your savings goals.
Of course, one reason why so many people resist budgeting is that they're intimidated by the idea of setting one up. But actually, you don't need to be a financial expert to create a budget. All you really need to do is list your fixed and variable monthly expenses, compare them to your net income, and see if that leaves you enough room to save money each month. To help you get started on your budget, here are six easy steps you can follow.
Step 1: List your fixed monthly expenses
Many of us have expenses that stay the same month after month. These might include your:
- Rent or mortgage payment
- Car payment
- Cable bill
- Gym membership fee
- Student loan payment
Start by listing these items on a spreadsheet along with their respective costs. This should be fairly easy to look up, as all you'll need to do is consult your most recent bill or statement.
Step 2: List your variable monthly expenses
Expenses that fluctuate from month to month are a little harder to budget for since you're not just copying a single number onto a spreadsheet. What you'll need to do with your variable expenses is comb through your credit card and bank statements, figure out how much you spent on each over the past year, and come up with an average. Your variable expenses might include items such as:
- Gas and electricity
- Cell and data service
- Personal grooming
- Fuel for your vehicle
Keep in mind that while you might spend roughly the same amount of money each month on things like groceries and gasoline, your utility bills, for example, might vary tremendously depending on the season. It could be that during the summer, your gas bill is $20 a month, but come winter, it climbs to $200 when you're running the heat. The best you can do in these situations is come up with an average cost and work with that number.
Step 3: Factor in one-time expenses
Many of us have bills that pop up once a year, like homeowners' insurance or a roadside assistance service. Forgetting about these expenses could throw the rest of your budget off, so review your bank and credit card statements and account for all of them. To come up with a monthly number to allocate, simply take each once-a-year expense and divide it by 12.
Step 4: Subtract your total costs from your total take-home pay
Once you figure out how much you're actually spending on a monthly basis, you'll need to compare that figure to what you bring home in your paychecks. If your spending exceeds your earnings, then you'll know you have a real problem on your hands. If you're mostly breaking even, that's not great, either. Ideally, what you should be aiming for is the ability to pay all of your bills and still manage to stick 10% or more of each paycheck into savings. If that's not the case, then you'll need to move on to the fifth step on our list. Otherwise, you can skip to the last one.
Step 5: Find ways to cut corners
If you're spending so much money each month that you're barely scraping by (or, worse yet, forcing yourself into debt), you'll need to examine your budget and figure out ways to trim your costs. This could mean slashing one major expense, such as your rent payment. Or it could mean making a series of smaller changes, like spending less on entertainment, downgrading your cable package, or pledging to be more frugal at the grocery store. It really doesn't matter which expenses you cut as long as it serves the ultimate goal of freeing up 10% (or more) of your income for savings.
Step 6: Review your budget for accuracy every three months
Your budget shouldn't be the sort of thing you set and forget. Rather, think of it as a work in progress. As your expenses evolve over time, you'll need to update your budget to reflect those new numbers. This means that if your lease renews mid-year and your rent increases by $50 a month, you'll need to account for that change. Furthermore, once that happens, you may need to work on shaving off that $50 elsewhere to stay on track. Though you don't need to go crazy checking your budget every week, aim to review it quarterly going forward.
While the idea of creating a budget might seem daunting, it's actually a pretty simple process. And the sooner you have that budget in place, the better positioned you'll be to get on top of your finances.