How to Create a Budget That Works!
In this article I am going to share simple steps for how to create a budget that works! These are simple steps that even those who hate budgeting or who have failed at budgeting before can do!
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How to Create a Budget: Simple Steps That Actually Work
I know that if you are trying to figure out how to create your first budget, you might be a little nervous. You may have a strong emotional reaction already when you hear the B word. You might feel nervous at the thought of even trying to get a handle on your money.
You might be afraid of what you’ll discover when you dig into the numbers. You might feel like you’re giving up your freedom by creating a budget. If it helps, use a different term—call it a spending plan. Call it your own personal P&L statement. Do what you need to to start breaking down any psychological barriers you might have to budgeting.
That is important because one of the best things you can do to build lasting financial security and wealth for you and your family is to create and begin to live on a budget or spending plan.
And when you do, you’ll likely feel like you got a raise. Because when you finally really start deciding what to do with your money each month, rather than just wondering what happened to it, you can start to do wonderful things with your money, such as really beginning to clean up your debt, saving, investing, and giving to causes you care about.
This is because, as one financial expert notes, by getting control of your finances—and particularly your spending—you gain control of your best wealth-building tool—your income.
If you managed the finances for a multimillion-dollar company, you wouldn’t dare do it without tracking all of the income and expenses—and if you tried to do your job without tracking the numbers, you would get fired pretty quick. That’s because you would not have the information you need to manage that money well.
And the reality is that over the course of your life, Your Family, Inc., is literally going to make you millions of dollars! Isn’t that exciting? I mean, really, when you think about it, isn’t that awesome news? So let’s get started making you wealthy! It will take a little time and effort, but you can do it! And I’m here to help you.
Simple Steps for How to Create a Budget
Here are the simple steps that you can follow to help you create your first budget (and be successful at it!) so that you can really begin to get control of your finances and work to reach your financial goals and dreams. These simple steps I discuss below will show you how to create your first budget and really begin winning with your money.
1. Track what you spend as you work to create your first budget.
Track what you spend for a couple of weeks or a month to really get a good feel for where your money has been going. This doesn’t have to be perfect; just do your best. Use a debit card to make purchases and pay bills as much as possible during this time so that you can go to your bank or credit union website to see what you have spent.
2. Start with a simple, hard-copy budget.
When you very first start budgeting, I recommend using a paper budget. This lets you gives you a simple way to create your first budget by helping you to get a rough idea of what you would like to spend where. You can sign up here for a simple budget that will help you get started.
3. Then switch to a digital budgeting system, if you prefer.
Once you get the hang of budgeting and have done it for a few months, go ahead and switch to a digital system.
Or if you really can’t stand paper and you prefer to do everything electronically, you can build a budget in Excel or use a program such as You Need a Budget (YNAB.com). It’s a great, user-friendly budgeting tool with a lot of awesome features.
Or, especially if you have begun investing for retirement or intend to soon, you should sign up for my favorite money tracking app, Personal Capital. Personal Capital not only tracks your spending for you and lets you see all of your bank accounts and credit card accounts but it also tracks your investment accounts, as well.
I love that it provides a complete picture of your overall financial situation and helps you monitor your progress If you’re investing in a Roth 401(k) or IRA or have other investments, then sign up for a free Personal Capital account here.
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4. List all income sources as you work to create your first budget.
If you have a job where you receive regular paychecks, this shouldn’t take too long. Simply add up all income (for you and your spouse), and write that number at the top of the page. Don’t forget to include freelance income and any money earned from second jobs, overtime, or side hustles.
5. List all of your expenses.
Then begin to list your expenses. Don’t forget to include tithing and charitable giving in this category.
Do a zero-based budget so that every dollar you have goes to a designated place. If you don’t, it’s almost certain that the unallocated money will get blown in one area or another. Be intentional with all of your money so that your money really works for you.
First list your regular, fixed expenses. Gather your regular bills, such as mortgage or rent payment, car payment, public transportation pass, utilities, health insurance premium (if not deducted automatically by your employer), cell phone bill, internet bill, car insurance bill, and so on.
Then list your variable expenses. After you add up all of your fixed expenses, figure out your variable monthly expenses such as groceries, gasoline, household expenses, clothing, entertainment and eating out, pet food and supplies, and toiletries.
6. Adjust your budget categories if you go over in an area.
Because you’re going to go off of a zero-based budget, if you decide you have to spend more in one area than you planned for, then you need to pull the money from another spending category. So if something comes up where you need to spend more on your gifts category, for example, because you receive a wedding invitation, then the amount in your entertainment category or fun money or clothing category or somewhere else will need to be adjusted. Your budget needs to balance out.
7. Don’t forget quarterly, semiannual, or yearly expenses as you work to create your first budget.
Be sure to account for irregular or infrequent expenses such as semiannual or yearly expenses. These include expenses such as homeowners and auto insurance, vehicle registration, life insurance, property taxes, and so on.
8. Decide how much money you want to go toward savings.
It’s likely when you first start budgeting that you won’t have a lot of money left over to put toward savings. It’s OK to start small, but as quickly as you can, start increasing the amount that you save toward specific categories. And no matter how little your income, start saving something right from the beginning if you possibly can, to get yourself into the habit of saving.
As long as you make a little more than your fixed expenses each month, then determine a realistic amount to save, and save that portion of your income before you do anything else—known as “paying yourself first.” If you plan to just “save what’s left over,” the chances that you’ll have anything left to save are slim.
If you crunch the numbers and you really just don’t have anything left over to put toward saving (and then paying off debt once your starter emergency fund is funded—see the next section) after paying all of your bills, then you should look at ways to earn additional income.
9. Fund your starter emergency fund (EF) first.
The first thing you should start saving toward after you create your first budget is a starter emergency fund. This is a crucial next step because an emergency fund gets you out of the mode of relying on credit cards and it really does virtually stop emergencies from happening.
It’s not that your car’s transmission never goes out or your roof never springs a leak, but those things are no longer emergencies—they are inconveniences because you have the money saved up to pay for them.
You should put all extra money above bare-bones expenses (that means minimal spending on eating out, entertainment, and so on) into your emergency fund until it is fully funded.
If you have consumer debt, start with a small emergency fund of $1,000 to one month’s worth of expenses (depending on how likely you are to need the money—for example, scale upward if you have an older car or home), and pay off your consumer debt before you build your full emergency fund of three to six months of expenses.
Try to build up your $1,000 starter emergency fund in a month or less by slashing expenses such as your grocery bill and entertainment spending, by selling stuff, and by earning extra money through overtime or a side hustle or second job.
Learn more about how to fund your emergency fund as quickly as possible.
10. Start working to pay off your debts.
After you start budgeting and have all of your expenses written down on paper, you will start to see areas where you can reduce your spending (see this article for more than 35 areas where you can cut your spending) in order to start paying off your debt.
Once you have a good handle on doing your monthly budget, try to set up your budget so that you can pay extra payments on your debt in order to have all of your nonmortgage debt paid off within 18 to 24 months—or faster, if you can! (You may want to find ways to increase your income or find things to sell in order to help you reach this goal.)
In order to pay off your debts, use either the snowball debt payment method or the avalanche debt payment method.
Briefly, the snowball method is where you list all of your debts smallest to largest and you pay just minimum payments on all of your debts except for the smallest one and then throw all of the money that you can toward that smallest debt until it is paid off. Then once that first debt is paid off, you use the all of the money from your budget that you were spending on paying off that smallest debt to attack your next smallest debt. And then so on.
With the avalanche method, you similarly pay minimum payments on all but one debt, but the debt that you attack first is the one with the highest interest rate. You will save on interest if you use the avalanche method, but I recommend that you follow the snowball method because of the motivation that comes from paying off the smaller debts first and getting the emotional boost from those relatively quick wins. The snowball method is the method we used to pay off more than $60,000 in nonmortgage debt.
11. Then fully fund your emergency fund.
After you have paid off all of your nonmortgage debt, then take all of the money that you were throwing toward paying off your debts and use it to fully fund your three- to six-month emergency fund. Try to do this as soon as possible—within six to nine months if possible.
12. Next, start to save toward other financial goals.
If you do not have any debt and you have already created your fully funded emergency fund, then start to save toward other financial priorities. In order to stay out of debt and build wealth, you’ve got to be able to cover your expenses without borrowing money.
And that means you need to have the money saved to cover these costs with cash. For financial well-being, all families should have the following savings accounts in place and be regularly funding them.
- Create a vehicle maintenance and replacement fund as soon as possible. Shorter term, funding your vehicle savings account prevents regular car maintenance and unexpected repair costs from becoming financial emergencies. And longer term, this fund helps you save thousands of dollars in interest by paying a car payment to yourself instead of to a bank or other lender.
- Create a house maintenance or down payment fund. If you are a homeowner (or plan to be a homeowner in the future), then this is a must. Eventually virtually everything in your home will need to be repaired or replaced. And some of those items are really expensive. Yes, homeowners insurance will take care of many things, but whenever you can, you should be your own insurance plan—you should self-insure by having savings to cover those inevitable expenses that will crop up. This will help to keep your insurance premiums as low as possible—so raise those deductibles! And there are some things that homeowners insurance simply won’t pay for (generally), such as burst water pipes, collapsed sewer lines, and damage caue by earthquakes, mold, floods, and more.
- Create other savings funds. Here are some examples of other savings funds that we have and that I recommend you set up as soon as possible:
- Save for vacations, Christmas, gift giving, larger household items (such as appliances and furnishings), and more. Once you have the essential items covered in your budget (food, clothing, shelter, transportation, and utilities, for example), begin saving for things like vacations, Christmas, household furnishings and appliances, and so on. The easiest way that I’ve found to do this is by having separate savings accounts for each category. Shortly after I got my first job I signed up for an ING checking account. What I loved about ING is that I could add as many different savings accounts as I want, and see them all together (and the sum total of the money in our various accounts). ING has since been bought out by Capital One, and even though I don’t generally recommend really big banks, I have to say that I’ve never had a problem with my Capital One 360 account. In fact, the one time I did have a problem (which was completely my fault—user error), they fixed it in about a minute. Their customer service was great. I know it’s going to sound a little crazy, but we have over 10 savings accounts for different things—for me, I just like to know we won’t accidentally spend money we have designated for one thing on something else.
- Create a dream fund. When you are out of debt and have begun to save for all of the above items, begin funding your dreams. Because learning to be financially savvy isn’t just so you can pay all your bills and retire with dignity and give to the causes you support—though all of those things are extremely important. It’s also so that you can really enjoy the many things money can buy, guilt free and without debt. This might mean saving for a motorcycle, a nice car, an RV, a boat, an exotic vacation—whatever you want. If you’re young or have a lot of debt it may be years before you can fully fund or maybe even start these savings funds, but if you keep it in the back of your mind, it will help you stay on track financially.
13. Begin long-term investing for your retirement and kids’ college, or ramp up your efforts in those areas.
There’s a saying in the personal finance industry that the best time to start investing was yesterday—and the next best time is now. So as soon as you can, start investing for retirement in a 401(k) or Roth IRA (or both!), and start saving for your children’s college expenses in an educational savings account (ESA) or college 529.
Even if you start with just $100 a month, the savings begins to grow quickly, and by seeing the progress you make, you’ll be motivated to save even more. We have investment accounts with both Schwab and Vanguard. Both are inexpensive, excellent options to help you start investing for retirement and saving for college today.
14. Automate your finances.
To avoid getting overwhelmed, automate as much of your finances as possible. I don’t have any bills that I regularly pay with a check—we use bill pay for all of our expenses, including tithing and charitable donations. Automating our financial transactions saves time and makes life much simpler (and helps me avoid forgetting to pay my bills!).
If you want to learn more about how to automate your bill paying, saving, and investing to simplify your life and start to build wealth, I recommend The Automatic Millionaire by David Bach. It’s one of my favorite personal finance books because it gives simple, actionable steps you can follow. And check out this article for more information on automating your finances.
15. Use cash for areas you learn you tend to overspend on.
Some areas that you’ll probably want to use cash for in your budget include food, entertainment, clothing, and personal fun money. You can use envelopes to keep your cash for the week or month or a wallet with different compartments.
16. Continue tracking your spending each month, and adjust your budget as needed over time.
It will probably take about three months to work out the major kinks in your budget, but then it will really start to work.
You should create a specific budget for every month because no two months are exactly the same, but once you’ve been budgeting for a while, your budget will be mostly set and you’ll only have to make minor tweaks from month to month.
However, when major events happen in life that cause big changes in your finances, be sure to adapt your budget accordingly.
17. Cut yourself some slack.
I mentioned this briefly above, but it’s worth repeating. You’re probably going to mess up when you first start budgeting. You’re likely going to overspend sometimes. Some months life may get so hectic that you forget to budget at all. But just keep working at it and giving it your best, and you’ll make huge strides and ultimately reach your financial goals and dreams.
As I said at the beginning of this article, by learning how to create a budget and learning to control your spending, you’ll have the means to be able to do some amazing things with your money.
You’ll be able to save for emergencies, give to causes you truly care about, retire in comfort, help your children pay for college, and buy a lot of fun toys and fund a lot of amazing experiences along the way.
But you’ve got to get to that point first—and the way to do that is with a budget or spending plan. So get started with it today! 🙂
What are your biggest struggles when it comes to how to create a budget? What has worked for you in the past when you have made a budget? Leave a comment below and let me know! I would love to hear your thoughts and ideas!
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