The Beginner’s Guide To Making a Budget

Making a well-kept budget is the key to keeping more money around and staying on target for your biggest spending goals.

And if you want to become a new homeowner in the coming year, your budget is your friend! The down payment and closing costs won’t pay for themselves, so opening a little room in your budget for those upfront costs is the first step to homeownership (and making your dreams a reality)!

Making a budget might seem pretty daunting, but if you’re starting to feel overwhelmed by the prospect of tracking your money, listen to this: building a budget is like building a house.

Well, not literally, but it’s figuratively like a house. You can’t make a budget all in one go. You need to build a foundation before you can start putting up walls. Deep stuff, right?

So worry not, friend! We’ve created a step-by-step guide you can follow to make a budget that’ll have you saving money in no time!

What Is a Budget?

Let’s establish some ground rules first. Like, what exactly is a budget? Many people need some kind of visualization of where their money goes each month, and that’s where a budget comes in.

Budgets are a game plan. They’re a self-made strategy for how your money will come in and go out; seeing it in writing will help you stick to your budget. They give you authority over your finances and help you save for the things that really matter: a new car, college tuition, vacation, or (something we know a lot about) your dream home. At its core, your budget should serve you and your goals.

Now let’s dive into the steps for creating a budget.

Making a Budget in Five Easy Steps

There are countless ways to make a budget. But here’s the trick: you’ll have to find a method that works best for you. One option is to crunch all the numbers inside a spreadsheet. You could also bust out a pen and pad of paper and write everything down that way too. Whatever you choose, the steps below will help you create a reliable and (mostly) reusable budget from month to month.

Step One: Calculate Your Monthly Income

Start your budget-making journey by calculating how much you bring home each month. Add up all your incoming profit, including your take-home pay and weekend side hustle. Make sure to specifically use your take-home pay, as calculating with your gross monthly income will skew your budget by including money automatically deducted from your paycheck for things like tax, retirement, or health insurance. Failing to make the distinction could lead to an inaccurate budget and, in the worst cases, spending more money than you have available.

But if you have an irregular income (we’re looking at you, self-employers), you might need a different strategy for figuring out your income. Try calculating a baseline by taking the average of the last 12 months’ pay. That should give you a rough estimate of your monthly income and a launching point for making your budget.

Step Two: Write Down Your Expenses

The next step is writing down your monthly expenses. Your money is probably pulled in many different directions each month, let alone each day, so be thorough. Don’t leave any subscription unturned!

A helpful tip is to break up your expenditures into two separate columns: fixed and variable. Fixed expenses are generally set in stone. Utilities, mortgages, car payments, and student loans probably cost you close to the same amount each month. On the other hand, variable expenses can change. You likely don’t spend the same amount at the grocery store, gas station, or local restaurant each time you make a purchase.

Add up your fixed and variable expenses (if you’re not sure how much you spend at the grocery store, just ballpark it) to approximate your monthly expenses. Now we can move on to the “hard part.”

Step Three: Subtract Your Expenses From Your Income

Dust off your abacus because it’s time for some heavy-duty mathematics. Yeah, not really. Subtract the expenses you wrote down – both fixed and variable – from the number you landed on for your income. And voila! That’s a nice-looking number you’ve got there. So, what’s next?

If your number is positive (meaning anything above zero), that means you have some money left over each month. Of course, that doesn’t mean you should go out and spend it all willy-nilly. Put your leftover funds toward a saving goal. It could be something we mentioned earlier – a new car or house, but you could also leverage those dollars into an emergency fund for life’s unexpected events.

And what if the number you come up with is negative? First of all, don’t panic! That only means you have a little work to do. Look over all your expenses to see what you need to cut out to get that number out of the red.

Step Four: Assess

Since the exercise above shed a little light on how much you’re spending each month, you can now decide what’s truly your wants versus your needs.

• One way to stack up your wants and needs is the “50/20/30 rule.” This principle says:

• 50% of your income goes toward mandatory expenses (mortgages, utilities, transportation, and childcare)

• 20% of your income goes toward savings and debt (credit cards and student loans)

• 30% of your income goes toward your “wants” (things that are fun)

Keeping this rule in mind while making your budget will give you a threshold for how much to allocate to each expense. If you need to, make adjustments to your budget now!

Step Five: Stay On Top of Your Budget

We’re not entirely out of the woods yet. In fact, staying on top of your budget is a full-time job. You’ll need to make adjustments if you ever experience a change in your finances. For example, a promotion at work or achieving one of your saving goals will make your budget outdated. Be accountable by factoring in these new changes as quickly as possible.

And while your budget will mostly stay the same from month to month, remember that life is unpredictable. You never know when an auto repair or trip to the doctor's office might eat into your funds. Throwing a few dollars here and there into a rainy-day fund is always a good idea.

Other Ways To Save

Looking for more ways to save? We’ve got you covered! Stick around the Knowledge Center (we love having you, by the way) and read up on our top five ways to save money. Happy reading!