If you don’t know how to budget, don’t worry. Building one is simpler than you might think, and it can make a big difference in your financial life. With a little organization and the right tools, you can gain confidence and control.
Here are 6 simple steps to create a budget that will work for you:
1. Determine Your Monthly Income
The first step in creating a budget is to understand how much money you bring in each month. This number will be the foundation of your budget. In addition to your regular paychecks, your income might also include things like tips, bonuses and commission, child support and alimony payments, government benefits, or rental income. A good rule of thumb is to use your net income instead of your gross income. This will give you a true picture of the funds you have available. Net income is essentially what you’re paid after taxes and voluntary paycheck deductions such as health insurance premiums and retirement contributions. Once you know your monthly income, you can start planning how to use it wisely.
2. List Out Your Monthly Expenses
Next, it’s time to review where your money is currently going. Tracking your expenses can feel overwhelming, but it’s one of the most important steps in the budgeting process. It helps you see your spending habits and identify areas where you may want to cut back. To get a realistic, accurate picture of your monthly spending, review your bank and credit card statements, receipts, and bills. It can be useful to review several months of spending so you can get an average, and account for any month-to-month fluctuations. Seeing the full picture can help you begin to make meaningful changes in your spending patterns if needed.
3. Sort Your Spending Into Categories
After you’ve determined your monthly expenses, sort them into categories. Categorizing helps you see where you might be overspending. This step can also help to ensure your final budget is realistic. Try lumping your monthly expenses into these categories:
- Housing: Rent or mortgage payment, including property taxes and homeowners insurance, if applicable.
- Utilities: Electricity, heat, water, internet, and phone bills.
- Transportation: Gas, car payments, car insurance, public transit costs, and parking fees.
- Food: Groceries, takeout, restaurants, and coffee.
- Home & Personal Care: Clothing, cleaning supplies, toiletries, and other household items.
- Health: Medical bills and copays, prescriptions, and health insurance costs (if not automatically deducted from your paychecks).
- Debt payments: Monthly payments for credit cards, student loans, and personal loans.
- Entertainment: Money spent on vacations, subscription and streaming services, movies and concerts, video games, books and magazines, sporting events, and hobbies.
- Savings: Contributions to a savings account, emergency fund, investment account, education fund, or retirement account.
Once you have a sense of how much you are currently spending in each category, you can compare it with how much you need to spend on each category. Ultimately, you’ll want to make sure that your total monthly expenses don’t exceed your monthly income. If they do, you should make some adjustments to your category spending.
4. Don’t Overlook Savings
A good budget treats monthly savings as a non-negotiable. As you’re establishing spending limits for each expense category, give thought to your financial goals. This will give your budget purpose and can help you stay motivated throughout the year. Your financial goals might include:
- Build a 3 month emergency fund
- Pay off a credit card
- Save for a vacation
- Plan for a major home repair
- Contribute more to retirement
- Save for a down payment
Make sure your goals are realistic and achievable. Setting smaller goals along the way can help keep you on track. For example, if you want to save $1,200 in the next year, break it down to $100 each month, and include it in your budget.
5. Formalize Your Budget
Once you know your income, understand your expenses, and have factored in your savings goals, you can put everything together into a working plan. Your budget should balance your income with your spending and savings, so you always know where your money is going. Using a budget calculator can help you streamline this step. You might also consider using budgeting apps, spreadsheet templates, or budgeting worksheets. These tools can help you organize your numbers, ensure accurate calculations, and visualize your spending. Your finalized budget should show how much you expect to earn, spend, and save each month.
6. Review and Adjust Regularly
A budget is not something you create once and forget. Life changes. Your income might go up or down, your bills can increase, and your goals may shift throughout the year. Reviewing your budget often helps you stay on track and make adjustments as needed. Be sure to review your budget:
- At the end of each month
- Whenever your income changes
- When you pay off a debt
- When you set a new goal
Regular reviews can help you catch small issues before they grow into bigger problems. They also help you celebrate wins, like reaching a savings goal or cutting back on unnecessary spending.
Build Financial Confidence
Creating a budget for the new year sets the stage for success. A good budget doesn’t just track numbers—it helps you make intentional choices that support your goals. BankFive’s free budget calculator can guide you through the process, helping you stay organized with a clear view of where your money is going. We also have a variety of savings accounts to help our MA and RI neighbors reach their financial goals.