Whether you’re broke or rolling in dough, it’s important to create a budget. Having a budget you can stick to is critical to your financial health, and it’s also critical to your mental well-being! After all, who wants to be stressing and struggling to make ends meet?
In this guide you’ll learn:
- How to create a budget you and your family can stick with, step by step
- How to know what your budget should be, and when you’re living beyond your means
- Ways to stick to your budget so that you don’t get caught in a pinch
Are you tired of living paycheck to paycheck? It’s time to create a budget that will help you build wealth and stop your financial stresses!
1. Set up your bank accounts
The first step you’ll need to take to create your budget is to set up bank accounts. You’ll need two – a checking account with a debit card, and a savings account. Ideally, you can easily transfer money back and forth between each account, but won’t be tempted to “steal” money from your savings in case of an emergency.
Your accounts can be held at any bank you choose to . We love credit unions, so if you have access to one in your community take advantage of it! As you search for your bank, keep in mind:
- Physical locations vs. online only banks
- The ease of transferring money between accounts
- Interest rates – remember that there are checking accounts which pay interest!
- ATM and other fees
Research the reputation of your bank or banks, and use that information to make your final decision.
2. Know what’s coming in
The second step to create a budget is to know exactly how much money you have coming in. If you work a regular job and earn a salary, this should be pretty easy. Simply look at a pay stub and you’ll see how much you have coming in every week, every other week or every month. If you live somewhere where taxes are deducted from your income, keep that in mind.
If you work hourly, it may be a bit trickier. After all, you may work 40 hours one week but 34 the next. You’ll have to be a little creative. Take last year’s total income and divide it by twelve to get an average of your monthly pay. Then, it’s a good idea to identify the lowest paying month in case of a worst-case scenario.
You can’t create an effective budget – or stick to any budget at all – if you don’t know how much money you have coming in. Don’t forget your non-employment income, too! Consider:
- Earnings from ride share driving
- Alimony
- Child support
- Rental income
- Royalties
- Anything else that you put into your wallet
3. Know what’s going out
When you create a budget, arguably the hardest part is determining where and what money is going out of your bank account. Sure, you’ve got rent or your mortgage. You’ve got the electric bill, the cell phone bill and the internet service.
But what about all that other stuff? The times you eat out in restaurants, or the money you spend on incidentals like gas and even trips to the movie theater? These things count, too! So you’re going to have to take a look back at your bank statements to see where your money’s going.
When you examine your bank account, there are tons of things you should consider.
- Entertainment, even including your streaming movies
- Gas and auto repairs
- Childcare expenses
- Medical expenses including prescriptions
- Any other expenses unique to you
There are bank accounts and apps that can help you with this. Some apps will actually help you track your spending by category. For instance, your grocery store purchases will be notated as “food” while gas station stops will be “auto.” Bear in mind that the candy bar you bought at the service station will be marked as “auto.”
Once you know where your money is going, it’s time to move on to step four of creating a budget.
4. Set your savings goals
In a perfect world, we’d all have enough money saved to cover us for a few months should things go pear shaped. If you lose your job, if you become disabled – you know the type of catastrophes we’re talking about.
Ideally you should have begun saving already, but if you haven’t, today is the day to begin. You’ve already set up a savings account in your name, and you should be easily able to transfer money into it. We’ll talk about that in just a few minutes.
Before you start putting money away, you’re going to need to figure out what you’re saving for. Is this an emergency fund? Are you saving to send your kids to college? To send yourself to college? Are you stashing money away so that you can retire in comfort?
Once you figure out what you’re saving for, you can begin to determine how much money you’ll need in your bank account. Figuring out your savings goals is an essential part of creating a budget. Whether you need $10,000 or $100,000, knowing the ultimate goal is the best first step.
Depending on where you live, there may be a variety of savings programs available to you, including:
- Savings bonds
- IRAs
- 401k
- 529 plans for your child’s education
- Regular savings accounts
- A sock under your mattress
Okay, we don’t really recommend that last one. Theft, fire and forgetfulness happen, so it’s best to keep your savings in some sort of bank.
Simply put, you need to have a savings account, and you need to know how much you ultimately want to save. Now it’s time to figure that savings plan into your budget.
5. How will you save?
You’ve figured out what kind of account or accounts you’d like to use to save. Now it’s time to figure out how you’re going to add to them. Your savings plan will factor into how you create your budget, but there are quite a few ways you can add to your savings account without breaking the bank. Here are a few ideas:
- Round up – when you splurge on movies or coffee, round your purchase up to the nearest dollar. There are some bank accounts that will do this for you automatically.
- Cancel your streaming video memberships, your gym memberships and more – then transfer this amount to your savings account each month. You won’t miss it – you were spending it anyway!
- Add all money you receive as gifts or money into your savings account, then don’t touch it!
- Be creative. You’ll find ways to cut your bills and save money and before long it will just be second nature to you.
6. What do you have to work with?
Alright. Now that you know your monthly income and your monthly expenses, you can figure out how much money you have to play around with. The “rules” of budgeting state that:
- Half your income should go to your “needs” including housing, utilities, car payments and other necessities
- Around 30% of your income should go to things you feel like you want. This could be your gym membership or your shopping habit – that’s up to you.
- About 20% of your income should go to savings and repaying your old debts. Credit cards, student loans and any other debt will fall into this category.
Now, that’s not to say that some of the “want” money can’t be put into the savings category! All the better for your savings account balance when you can add extra each month! But these general guidelines will help you allocate your paycheck to each of the categories and create a budget.
Here comes the tricky part. You’re going to need to figure out how you’re doing. If your needs aren’t within around half your budget, and your wants or your debt repayment isn’t overpowering your budget. Let’s look more at that in step seven.
7. Evaluate your current spending
You’re going to have to take a long, hard look at your current spending if you want to create a budget that meets your needs and your means. We’ve already talked about the percentages of your income that should be allocated to specific things. Now, let’s look at what you’ll need to do if they’re not.
The first thing you should do if you’re spending more than you should on any particular category is simple – stop. Now, this could be as simple as spending less on jewelry or on gourmet foods. It could also be as complicated as refinancing loans to lower your monthly payments, or even moving.
- Are you paying for too much home? Consider downsizing and moving to a smaller, less expensive place.
- Too much car? Trade it in for a used model that will get you from point A to point B safely.
- What about that cable? This one’s easy – you don’t need it. Rather than paying upwards of a hundred bucks or more each month, switch to a streaming service like Amazon, Hulu or Netflix – whatever is available in your area. They’re a fraction of the cost and have great entertainment.
- Your cell phone bill is probably too high. If you’re paying for unlimited data, for instance, look at your past months’ usage and see if you need that much. Family plans aren’t always cheaper, either. And consider a prepaid plan – they’re often just as good as the contract plans and 99% of the time they use the same network.
- Do you need to take your kids to get a haircut every month? See if every other month or so will suffice. If you have boys, buy a pair of clippers and take a DIY approach if you feel confident enough.
- Buy used! Go to your thrift store for furniture, clothing and other items. Underwear and shoes, though, should be bought new. Yuck.
As you can see, there are plenty of ways to cut your monthly expenses, and some are more complex than others. Consider all your options as you create a budget to get your “needs,” “wants” and savings into the right proportions.
8. Consider what your savings are doing
You’ve spent a lot of time researching and setting up your savings accounts. Now it’s time to determine whether they’re working for you. Is the interest you’re earning enough for your savings goal needs? Or would it make more sense to invest that money elsewhere and watch it potentially grow.
We’re not financial advisers – we can’t tell you where to invest your money. But there’s a good chance that if it’s just sitting in an account gaining 2% interest, you can do better. Talk to a financial planner about investment options that are right for you, your budget and your lifestyle.
When you move your savings to an investment account, don’t worry about including the income when you create a budget. It’s best just to leave it alone and watch it grow. Re-evaluate your investments from time to time – say, yearly – to determine if your money is in the right place or if you should consider making some changes.
9. Think about your year in advance
Things are well underway as you create a budget! Congratulations, you’ll be living better and within your means in no time at all! But there’s something you may not have considered – your needs change throughout the year.
There are some obvious examples of this. Your kids’ birthdays, for example, are going to cost money. Family (or personal) vacations cost, too. Holidays that you celebrate like Christmas or even Halloween will cost you. So will school supplies, college textbook purchases and more.
If you work on a commission basis, there are probably some months that are slower at work than others. Typically summers can be pretty lean, while the holiday season can make you feel like a king or queen. Budget for these months as you create your plan.
Other not so obvious reasons for changes to your budget would be lower electric bills in the fall and spring, but you may tend to get out and about more during those milder months. You get the idea.
The point is this: it’s best to plan on an annual basis, not just a monthly one. If you have a month where your “wants” are few, or your electric bill is lower, take that money and put it n a rainy day fund. That way if you find yourself short one month, you can simply pull from this piggy bank and not worry about messing with your larger savings account. Feel free to open a third bank account for this purpose. Just don’t dig into it unless you need to!
10. Let your family in on the secret
Your family members will become your strongest allies when you create a budget. At first, they may be quite miffed that you’re cancelling the cable service. But you’ll find that, in a very short amount of time, they’ll be on board and will even help finding additional ways to stick to a budget.
Let your family know your plans. Your spouse will probably be the easiest to convince that it’s a good idea to create a budget. After all, he or she will likely be contributing to the income, so saving it will sound very appealing! Your kids, though, will be hard to convince at first. Telling them there will be only one sport this year – well – that’s a tough sell.
That said, there are ways you can bring everyone on board with budgeting and saving.
- Create a special account to save for a family trip
- Help your kids learn how to manage money by offering them an allowance – for chores performed, of course. Then, help them save money as well!
- Discuss their wants vs their needs. Explain to them that wants are important, but needs are critical. This should be a fun conversation, not a lecture!
- For older kids, feel free to let them open their own debit account. They can use their cards at store for whatever they want. (Within reason, of course.) They’ll learn quickly that when they’ve spent their money on candy, there’s nothing left for that video game they want.
There are oodles of ways you can get your kids’ approval for a new budget. Just make sure you don’t cut all the fun stuff out – kids will be kids and they need a bit of adventure in their lives!
11. Make your budget visual
Let’s face it – some people are just visual people. If you can’t balance a checkbook to save your life (some of us here haven’t had a checkbook register in 20 years) you may do better to have visual interpretations available where you can view your spending and your budget.
After you create your budget, create some sort of chart that will allow you to track what you’ve spent for the month. You can do this online, but we find it’s easier to just post it on a printout or a whiteboard on your refrigerator – anywhere the whole family can see it.
Your chart will have three components: the needs, the wants and the savings. As your monthly bills are paid, fill in the corresponding portions of your needs chart. As you spend money on entertainment and impulse buys, fill in parts of your wants chart. And as you contribute to your savings or pay off your creditors, you’ll fill in your savings chart.
Having a visual representation of the budget you’ve created will help you see what you’ve spent and how much more money you have to spend each month. It will also let your family know that you’re getting close to your spending limits, so it’s time to trim the fat a bit.
12. Don’t be obsessive, but don’t be compulsive
You’re going to spend money. You can’t really do anything in this life without dishing out a few bucks. Say that new princess movie comes out and your daughter just can’t live without seeing it – that’s going to cost money. (You can’t say no to your little princess!) Or your child has a book fair at school and falls in love with the idea of reading Harry Potter. That’s going to cost, too.
Don’t be obsessive about the money you spend – leave yourself a little wiggle room and be a little forgiving of yourself. But don’t be compulsive, either. Keep your impulse purchases to a minimum. Lock your credit card away at home – don’t carry it with you. Better yet, don’t have a credit card at all.
You’re going to make mistakes, especially if you’ve never tried to create a budget before. Think of yourself as a child, learning to manage money for the first time. Setbacks are going to happen, so when they do you’ll want to figure out ways to overcome them. It’s all part of the process.
13. Consider your advisory options
If you’ve never thought to create a budget before, there are people you can talk to. Should you feel that you need a little help, you can:
- Hire a professional to sit down and go over your finances with you
- Get a trusted (and financially bright) friend to help you figure out what your budget should look like
- Talk to family members who you can trust with your financials – parents are great for this!
- Read books and do online research to help you figure out what your budget should look like
- Take a budgeting course at your community college or library – these are inexpensive or even free options
- Sit down and chat with your spouse
Help is there when you need it. We know that budgeting can be super overwhelming and downright confusing, so there’s nothing wrong with enlisting a little assistance if necessary. Don’t try to do it on your own if you find it’s too much for you.
14. Continually review and revise
When you create a budget, it’s not “one and done.” You’re going to need to constantly review your income and your spending because the truth is that stuff changes!
- You no longer have to spend money on diapers – but now your child needs school supplies and clothes
- You’ve gotten married or divorced
- You added a pet or a new baby to your household
- Your adjustable rate mortgage changed and altered your “needs” budget
- You’ve paid off your car – congratulations! What will you do with that money?
- You’re on strike or have been laid off from your job – what comes next
As you can see, there are many factors that can influence the way you spend your money. There are also factors that will influence the amount of money you have to spend. It’s critical that you spend time re-evaluating your budget from time to time to ensure it still meets your needs.
15. Discover money-saving tips
We’ve talked about quite a few ways to save money on this website. However, if you’re looking for quick tips to save on your monthly expenses and stay within your means, we have them. As you create a budget, it’s not necessarily important to incorporate these tips. Instead, enjoy the money you’ll save and apply them to your savings account.
Here are several ways you can save money on your everyday expenses without feeling the burn of your budget.
- Go green. When you turn off the lights and keep your water usage low, you’ll save money and do good for the environment.
- Walk or cycle to work. Where possible, walk, ride your bike or use public transit to get to your destination. This is another green tip that’s great for the planet.
- Skip the coffee shop. Those expensive coffee drinks are killing your budget – and are packed with sugar and calories, too.
- Plan your meals. Make a weekly menu, then take one trip to the grocery each week. Or, order grocery pickup service and skip those impulse buys!
- Keep yourself out of debt. Credit cards, car loans and other debts carry high interest charges that really add up. Pay cash for your wants.
- Think about your purchases before you buy them. Do you really need to buy that new couch? Give it a few weeks to think about it before you dish out the cash.
- Buy once, cry once. When you buy quality products that last, you’re less likely to have to replace them in the near future. Don’t be afraid to pay more if you know the item is quality craftsmanship. Cars are a great example of this.
- That said, you should be thrifty in other areas. Your clothing, for instance, should usually come from thrift shops or other discount stores.
Use your imagination! You can save money in tons of ways – use coupons for your groceries, regularly re-evaluate your car insurance and don’t use disposable diapers. You get it. You’ll save money without thinking about it before long at all!
Conclusion
You don’t have to be a financial expert to create a budget you can stick to. Consult with advisers if you must, but be sure you factor in your needs, your wants and your savings to create a budget that works with your family and your lifestyle. In doing so, you’ll develop lifelong habits that will let you live comfortably from now on!
