I get asked about how to start building a budget quite a bit, so I thought I'd break down 10 steps (with lots of good advice and old posts mixed in!) to building your first, or maybe your second or third, budget. Either way, if you use these steps, you'll end up with something that is both fabulous and that works for you.
The 10-Step Guide to Building a Budget
1. Track Your Spending
Sign up for an online budgeting software (You Need a Budget, Learnvest, and of course, Mint.com are the front runners.) Sync your checking accounts and folder your transactions so you can see where your money goes each month. You absolutely CANNOT build a budget without knowing what you're spending on first.
2. Figure Out Which Budget Strategy is For You
Maybe you want to do the 50-30-20 method (I recommend this for beginners, see below!), or perhaps you want to just pay your bills and then spend the leftover however you'd like (which is how I budget nowadays), or maybe you seriously need to cut back on personal spending and want to try the all-cash or envelope budgeting method.
Each of these strategies requires a different approach to building a budget, which is why it is important to first decide how you'd like your budget to work before you set pen to paper.
3. Figure Out Your Amounts
Many budgeting newbies (including myself when I was first getting started) find it helpful to use the 50-30-20 rule to start. This provides a nice baseline for how much you should be spending each month on fixed expenses, financial goals/debt repayment, and personal spending money, based upon how much you take home in your paycheck.
It goes a little something like this: 50% for fixed expenses (rent, utilities, groceries, insurance, cell phone) 20% for debt repayment and savings (student loans, credit cards, and savings) and 30% for discretionary spending. So for example, if someone takes home 3000.00 per month after taxes their budget should break down a little bit like this:
- 3000 x .50=1500.00 for fixed expenses
- Then, 3000 x .20=600.00 for debt/savings
- And finally, 3000 x .30= 900.00 for spending or “fun” money
4. Start Backwards
Staff writer Jordann recommends this fantastic formula for figuring out your budget.
Income – Fixed Expenses – Debt Repayment/Savings – Variable Expenses = Personal Spending Money
Start with what you absolutely have to pay in fixed expenses like rent, utilities, car payment etc. Then factor in your debt repayment and savings goals FIRST. Then break out the personal spending money based on what your needs are each month.
5. Budget for Goals
If you spend first and then assume you'll make savings/debt payments at the end of the month with what is left over, you'll be disappointed every time. It's the golden rule of personal finance- PAY YOURSELF FIRST, HOMIES! (See our best tips for saving success here.)
If you want to get really aggressive with your goals you can cut your personal spending money to try and funnel more cash toward your progress. In NYC I paid off my college credit card debt by only allowing myself 15% spending money out of my paychecks each month. It was tough, but in the end it was for the greater good. In 2015, I've been able to pay off over 50% of my most recent credit card debt by going on a “debt diet.”
6. Budget for Spending
Budgeting is like dieting- it only works in the long term if you allow yourself indulgences. So while you can definitely get aggressive with your goals by cutting personal spending money, you should still allow some money just for fun. Otherwise, why work so hard? You'll get burned out, or suffer from debt fatigue.
Whatever you want: to take a weekend getaway or an international trip, a Sephora run, a new car…it is all possible if you allow yourself to budget for indulgences both big and small.
7. Review “big picture” and “little picture” spending.
I think reviewing spending over time is the most important component to building a budget that is successful. Reviewing your spending from time to time allows you to adjust if you go over budget, course correct, and see your spending patterns over time. After looking at my own expenses from 2014 I was shocked at how much I paid in credit card interest and on eating out. Yikes!
Sometimes on a monthly or daily basis we are unable to see what we need from our own finances. Need a spreadsheet? I provide a template in the resources section of the site!
8. Tweak And then Tweak Some More
After a month or two, come back to your budget and see what is working and what isn't. Perhaps you spend more in one category, perhaps you spend a lot less. Feel free to adjust your budget whenever necessary!
9. Actually BUILD YOUR BUDGET
You can use the budgeting software you signed up with to track your expenses or build your own using an excel spreadsheet. Personally, I use a healthy mix of the two for greater control.
It doesn't matter what you do, just make sure your budget “lives” somewhere other than just in your mind.
10. Love Your Budget
Budgeting can suck. Especially if you feel you're not great with finances, or if you know you need to reign in your spending. Rather than framing it in a negative way, think of it like this: having a budget is just a nice guideline for your own personal finances. It shouldn't rule you with an iron fist.
If you do it correctly, having a budget can actually be quite freeing and allow you to grow as a person and accomplish things (both financially and personally) that you never imagined!
And of course, if you find your budget to be a little tight or don't like how much you're bringing home, you can always increase your income.