How To Build A Budget
Updated: Aug 22
Budgeting is the process of determining and limiting all expenditures, managing financial resources, and setting up priorities for the use of those resources. Budgeting is an essential part of personal finance management. It can be done on paper or with computer programs; either way, it's not difficult to learn and do. The purpose of budgeting is to limit spending in order to avoid overspending and accumulating debt. A good plan should help people live within their means while saving for future expenses like retirement or college tuition.
1. Calculate your income:
In order to build an effective budget, it is important to know exactly how much you are bringing in. Add everything up from your paycheck, any bonuses, and investments.
The total of all of this is the amount that you have available to spend every month. Your income may or may not be subject to taxes; some budget makers leave taxes out for ease of calculations while others include them.
2. Calculate your expenses:
In order to create a realistic budget, you need to calculate all of your necessary expenses. These expenses are things that you absolutely must pay in order to live comfortably. Basic necessities include:
Housing - Mortgage or rent payments, property taxes, homeowner's insurance, and repairs.
Transportation - Car payment, gas for the car, maintenance costs, tolls, and other miscellaneous charges.
Utilities - Phone bill (if applicable), electric bills (gas and water too if appropriate), internet service provider fees, and home repair.
Household - Food, toiletries (toilet paper, shampoo), cleaners for the house, laundry soap, etc.
After you have listed all of your necessities, start thinking about other costs you may encounter on a regular basis. Do you go out to eat often? Are there any extracurricular activities or lessons your children attend that you must pay for? Do you take any trips during the year? What about work clothes and supplies; those should be included as well.
3. Start saving:
Once you have a concrete list of all your necessary expenses, it's time to see what you can cut. Once you have trimmed the fat and determined that there is nothing extra to eliminate, it's time to fill up your accounts. Most people should have two bank accounts, a checking and a savings, except they shouldn’t be used how you think.
Your checking account should hold 1-2 times your monthly expenses and should be the account that withdrawals and payments are made from. Your savings account should be an emergency fund that is capped at 3-5 times your monthly expenses for unexpected one time expenses. And both accounts should be refilled to their caps at each paycheck.
4. Build an emergency fund:
You should always have an emergency fund for unexpected emergencies. There are a lot of things you can't predict in life that could potentially wipe out your savings if you haven't planned ahead. Try to keep at least three months' worth of expenses saved up in case something goes wrong; this money is for emergencies only and should not be used to pay monthly expenses.
5. Open A Brokerage Account:
Once you’ve budgeted, set your accounts to be capped at specific limits, and finally have some leftover money, it’s time to open a brokerage account. The leftover funds each paycheck should be used to buy stocks, bonds, and other assets. This way, your money is working for you to make more money.
6. Tweak your budget now and then:
Every once in a while, you should reevaluate your budget. Are there any changes to your household that would affect the way you spend money? Have some of your goals changed? Do you have more money coming in now than before? If so, can you increase how much is going into the brokerage account for a particular goal? These are questions that you should ask yourself every once in a while to make sure your budget is still effective.
7. Stick to your budget:
It's important to stick to your budget even when it seems hard. It can be tempting to go over a little bit in some areas, but that is how people fall into debt; by not living within their means and overspending what they have available.
Using your budget to build wealth is one of the best ways to guarantee yourself a secure financial future. It's not always easy, but once you get into the habit of living within your means, it'll be something you won't even have to think about.