Editorial Note: We earn a commission from partner links on Forbes Advisor. Commissions do not affect our editors' opinions or evaluations.
Whichever method you choose, personal budgeting involves three basic routines:
- Track what you earn and what you spend.
- Work to keep the second number lower than the first.
- Lather, rinse, repeat each month.
Unfortunately, just because budgeting is simple doesn’t mean it’s easy. And if you’ve never created a budget, you may feel overwhelmed by what exactly you are supposed to do, and how you’re supposed to do it.
Thankfully, despite reports to the contrary, starting a budget from scratch doesn’t have to be painful or difficult. Here’s how you can create a straightforward and simple budget that works for you.
Step 1. Embrace the Ongoing Process of Budgeting
We often tend to think of budgeting as a one-and-done kind of chore. You sit down with your accounts and receipts. You figure out how much you have been spending. You plan for how much you will spend in the future.
Let’s look at an example, using a composite couple, “Henry” and “Janine.” The first time Janine and Henrytried to make a budget, they realized they had dropped over $450 the previous month on dining out. So they vowed to spend no more than $50 a week at restaurants—and went on their merry way feeling good that they’d made a budget.
If this is what you think of as budgeting, it’s very tough to actually get ahead, as Janine and Henry learned. After creating their first budget, the couple was not actively tracking their spending, so they didn’t notice when they had blown past their self-imposed restaurant spending limit. They didn’t understand why they were still struggling to make ends meet. Eventually, it got to the point where they had to sit down to create a budget again and start the whole process anew.
The best way to set yourself up for budgeting success is to embrace the fact that budgeting is the ongoing strategy you will use to live the financial life you want. Instead of thinking of budgeting as a one-time or occasional chore, it’s better to think of it as a regular maintenance task, much like doing your laundry.
Like money management, your laundry is an ongoing responsibility that cannot be avoided, ignored or forgotten without some serious consequences. Going into your brand new budget with the acknowledgement that you are committing to a regular and ongoing process will help you maintain your budget, which is far more important than just creating one.
To get ready for this new, ongoing task, Janine and Henry schedule weekly time to go over their budget together.
Step 2. Calculate Your Monthly Income
Once you’ve embraced the realities of the budgeting process, you’re ready to start getting into the nitty-gritty numbers. You’ll start by calculating your monthly income.
For anyone who receives a salary from a traditional employer, this part will be very simple. You’ll just need to take a look at your most recent pay stub to see how much you earn per paycheck. You can then multiply that by four if you’re paid weekly or two if you’re paid biweekly or twice a month.
Janine receives a paycheck of $1,550 on the 1st and 15th of every month. Multiplied by two, her monthly take-home pay is $3,100. Knowing this amount gives her a starting point for calculating her budget.
However, if you work as a freelancer, have side hustles, earn hourly pay or overtime or rely on tips or commission, your monthly income is a little more difficult to calculate. In that case, gather your income information for the past three to six months and calculate the average. This can give you an understanding of how much you earn each month on average.
Henry works as a freelancer, so his income fluctuates. By looking back at his income for the past six months, however, he learns that even though he only brought in $1,300 in one month and nearly $8,000 another month, his average earnings month-to-month (after setting aside his quarterly estimated tax payments) is $3,500.
Between Janine and Henry, their average monthly income is $6,600 (Janine’s $3,100 income + Henry’s $3,500 average monthly income).
Step 3. Add Up Your Necessary Expenses
Your necessary expenses are the bare minimum you need each month to maintain your life. These include fixed expenses and variable necessities.
Most people have a basic sense of their fixed, or recurring, expenses. For instance, you know exactly how much you pay for your rent or mortgage each month.
Now’s the time to look up and record every single one of your fixed expenses. These can include:
- Utilities, including mobile phone and data/Wi-Fi access (if these fluctuate, calculate the monthly average over the last 12 months)
- Car payment
- Auto insurance
- Student loan payment
- Alimony or child support
- Day care expenses
- Monthly memberships (such as gym membership)
Janine and Henry’s fixed expenses look like this:
Janine’s student loan
Henry’s student loan
These fixed costs are the easiest to track, as they generally stay the same from month to month. But you’ll notice that some necessary costs are not included in these expenses, like groceries or prescriptions. These are the variable but necessary expenses that can change from month to month.
For variable expenses, it’s a good idea to calculate the monthly average over the last 12 months. (If there are expenses that don’t come up monthly, add up the total annual amount you have spent and divide that amount by 12 to determine your monthly average.) Include the following irregular-but-necessary expenditures:
- Medical appointments
- Renters insurance/Homeowners insurance
- Car maintenance and repair
- Home maintenance and repair
- Credit card payments
Let’s take a look at Janine and Henry’s variable but necessary monthly expenditures:
|Variable But Necessary Monthly Expenditures
Car maintenance and repair
Gasoline, parking, tolls
Credit card payments
Once you have calculated the amount you spend each month on these necessities, you have your baseline spending budget.
For Henry and Janine, their baseline monthly spending budget is $3,430 ($2,190 in fixed monthly expenses + $1,240 in variable monthly expenses).
Step 4. Add “Pay Yourself” Line Items
Paying yourself means funding financial goals and plans before spending your discretionary money. Many people forget to include these kinds of goals in their budgets, assuming they will meet their goals with whatever is “left over” at the end of the month. But planning on using leftover money often means your goals are left out. So the next step in creating a sustainable budget is to create line items in your budget for your major goals.
Start by jotting down your financial goals. Some examples include:
- Building an emergency fund
- Paying off debt
- Maxing out yourretirement contributions
- Saving up for a major purchase
When you have chosen your goals, figure out how much you will pay toward each one every month. If you have a deadline in mind, divide the amount of money your goal will take by the number of months until the deadline to determine your monthly savings amount.
Add these pay-yourself-first amounts to your fixed expenses. Considering your financial goals to be fixed expenses and line items in your monthly budget will help you get in the habit of prioritizing your goals.
Henry and Janine have several financial goals they’d like to reach, including paying off their student loans more quickly, saving for retirement, saving up for a trip to Machu Picchu and someday buying a house of their own. They decide to pay the following amounts toward each goal:
Janine’s student loan
$140 (on top of the $310 required payment, for a total monthly payment of $450)
Henry’s student loan
$85 (on top of the $415 required payment, for a total monthly payment of $500)
Machu Picchu trip
Janine and Henry’s spending budget is now at $4,755 ($3,430 in baseline spending + $1,325 in pay-yourself-first items).
Step 5. Plan for Your Discretionary Expenses
Now that you have calculated your baseline spending and the line items for your financial goals, you’re ready to add in discretionary expenses. These are the expenditures that you want rather than need. They may include things like entertainment, dining out, clothing and the like.
While some discretionary expenses may be needs(such as clothing, unless your workplace is remarkably open-minded), how much you spend on these items is up to you.
Calculating these expenses is a little more complicated than the previous steps. That’s because you will need to know more than just what you have spent in the past. Start with those numbers, and use them to decide if those amounts are too high, too low or just right.
For instance, you might discover that you spend $150 going out to lunch each month. This step gives you a chance to understand how much you’re spending on convenience and to adjust your spending plan. On the other hand, if you realize you’ve gone three months between haircuts to save money, but you really prefer how you look when you go every six weeks, you might increase your haircut budget.
Now you add your ideal discretionary spending amounts to your expenses to create your monthly spending plan.
Let’s take a look at Henry and Janine’s monthly discretionary spending plan:
|Monthly Discretionary Spending Plan
Entertainment (including streaming services)
Personal care (including haircuts/gym membership)
With the addition of discretionary spending, Janine and Henry now have a spending plan of $5,495 per month ($3,430 in baseline spending + $1,325 in pay-yourself-first items + $740 in discretionary spending).
Step 6. Compare and Adjust
Compare your expenses to your income. If the expense number is lower than or equal to your income number, then your budget is balanced. In that case, you are ready to implement your budget.
If, however, your expenses are higher than your income, then you need to adjust your spending. You can do this by playing with any of the non-fixed expenses. An important caveat about your adjustments is that you should focus on the discretionary spending or variable spending (such as your grocery budget) before you reduce your savings for your financial goals. Protecting your pay-yourself-first line items in the budget will help ensure you reach the important financial milestones that matter to you.
For Janine and Henry, their monthly spending plan of $5,495 is well below their average monthly income of $6,600. However, since Henry’s income is variable, they will need to come up with a plan for the lower-than-average months. For instance, in the month Henry only brought home $1,300, their total income was $4,400. They will need to determine which items to cut during such months or how they can capture his surplus income during higher-income months to smooth over the lower-income months.
Step 7. Implement and Track Your Spending
With a balanced budget, you’re ready to put your spending plan into action. Start spending and saving based on the budget you have created.
Implementing your new budget is about more than just keeping your spending limits in mind, however. You also will need to track your spending to identify any weak spots. The best way to keep track is via whatever tool works best for you, whether that means using a budgeting app, a spreadsheet or pen and paper.
For example, Janine has been spending $10 every day on lunch at her workplace cafeteria. She and Henry have a weekly budget of $50 for dining out, but Janine’s cafeteria spending means she blows through that budget at work rather than on evenings or weekends. Rather than beat herself up, Janine works to figure out what is prompting her to buy food there after she has decided not to.
Janine might realize that she never remembers to pack lunch, so she and Henry begin to pack a week’s worth of lunches every Sunday. Or she may realize that she brings her lunch, but it’s never as appealing as hot food. In that case, she decides to stop carrying cash to work to ensure that she eats what she brought.
As you implement and track your budget, you’ll notice patterns over time. These will help you make changes as needed to your budget and figure out what is important to you.
Budgeting Can Set You Free
Budgeting often gets a bad rap, but it’s all about spending money on the things that matter most to you. The simple process of budgeting presents a great learning opportunity for you and your family. If, like Janine and Henry, you’re budgeting as a couple, take the time to address your individual and shared goals, including the finances that will support them.
Henry and Janine’s budget, as outlined above, is very close to being a 50/20/30 budget, where approximately 50% of your income goes toward needs, 20% goes toward debt reduction and savings, and 30% is available for wants. Another useful budgeting model is a zero-based budget, where every incoming dollar is assigned a specific job.
If you are a freelancer or have an income that varies, your budget will need to include a larger savings buffer for the occasional months when your income is lower than expected, as well as a plan for optimizing those months when your income is higher.
No matter what method you use, by calculating your income and expenditures, determining how you will meet your financial goals and planning for your discretionary expenditures, you will have the framework you need to make your finances fit your life.
Greetings, financial enthusiasts! I'm here to guide you through the intricacies of personal budgeting, drawing from my extensive expertise in the realm of financial management. With a proven track record in understanding and implementing effective budgeting strategies, I'll break down the concepts used in the insightful article you just read on Forbes Advisor.
The article emphasizes three fundamental routines for personal budgeting:
Track Your Income and Expenses:
- This involves recording what you earn and what you spend regularly.
- The goal is to keep your spending lower than your earnings.
Make Budgeting an Ongoing Process:
- Budgeting is not a one-time task but a continuous, evolving strategy.
- Regularly track and adjust your budget to align with your financial goals.
Embrace the Budgeting Process:
- Instead of viewing budgeting as a burdensome chore, consider it a routine task, akin to ongoing responsibilities like laundry.
- Regularly schedule time to review and update your budget.
Now, let's delve into the specific steps outlined in the article:
Step 1: Embrace the Ongoing Process of Budgeting
- Budgeting is not a one-and-done task; it's a continual strategy for financial well-being.
- Regularly review and adjust your budget to ensure effectiveness.
Step 2: Calculate Your Monthly Income
- For salaried individuals, determining monthly income is straightforward.
- Freelancers and those with variable income should average their earnings over the past months.
Step 3: Add Up Your Necessary Expenses
- Fixed expenses (rent, utilities, loan payments) are easy to track.
- Variable but necessary expenses (groceries, medical costs) should be averaged over the past 12 months.
Step 4: Add "Pay Yourself" Line Items
- Allocate funds for major financial goals before discretionary spending.
- Treat financial goals as fixed expenses in your budget.
Step 5: Plan for Your Discretionary Expenses
- Discretionary expenses include wants rather than needs, such as entertainment and dining out.
- Evaluate past spending patterns to determine appropriate discretionary amounts.
Step 6: Compare and Adjust
- Ensure your expenses are equal to or lower than your income.
- Adjust discretionary spending before reducing savings for financial goals.
Step 7: Implement and Track Your Spending
- Put your budget into action and track spending patterns.
- Identify weak spots and make adjustments to align with your financial goals.
The article also touches on the importance of understanding your spending patterns over time and making informed changes to your budget accordingly. It suggests that budgeting is not about restriction but about allocating resources to what matters most to you.
In conclusion, effective budgeting provides a framework to make your finances align with your life. Whether following a 50/20/30 budget or a zero-based budget, understanding your income, expenses, and financial goals is essential for financial freedom.