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How to Make a Budget in Six Simple Steps

Before you embark on making a budget, find a good template you can use to fill in the numbers for your expenses and income.

While you can use old-fashioned pen and paper to budget your money, it’s easier and more efficient to use a monthly budget spreadsheet or a budgeting app. These will contain designated fields for income and expenses in various categories, as well as built-in formulas to help you figure your budget surplus or shortfall with minimal effort.

1. Gather Your Financial Paperwork

Before you begin, gather up all your financial statements, including:

  • Bank statements
  • Investment accounts
  • Recent utility bills
  • W-2s and paystubs
  • 1099s
  • Credit card bills
  • Receipts from the last three months
  • Mortgage or auto loan statements

You want to have access to any information about your income and expenses. One of the keys to the budget-making process is to create a monthly average. The more information you can dig up, the better.

2. Calculate Your Income

How much income can you expect each month? If your income is in the form of a regular paycheck where taxes are automatically deducted, then using the net income (or take-home pay) amount is fine. If you are self-employed or have outside sources of income, such as child support or Social Security, include these as well. Record this total income as a monthly amount.

If you have a variable income (for example, from a seasonal or freelance job), consider using the income from your lowest-earning month in the past year as your baseline income when you set up your budget.

3. Create a List of Monthly Expenses

Write down a list of all the expenses you expect to have during a month. This list could include:

  • Mortgage payments or rent
  • Car payments
  • Insurance
  • Groceries
  • Utilities
  • Entertainment
  • Personal care
  • Eating out
  • Childcare
  • Transportation costs
  • Travel
  • Student loans
  • Savings

Use your bank statements, receipts, and credit card statements from the last three months to identify all your spending.

4. Determine Fixed and Variable Expenses

Fixed expenses are those mandatory expenses that you pay the same amount for each time.2 Include items like mortgage or rent payments, car payments, set-fee internet service, trash pickup, and regular childcare. If you pay a standard credit card payment, include that amount and any other essential spending that tends to stay the same from month to month.

If you plan to save a fixed amount or pay off a certain amount of debt each month, also include savings and debt repayment as fixed expenses. 

Variable expenses are the type that will change from month to month, such as:

  • Groceries
  • Gasoline
  • Entertainment
  • Eating out
  • Gifts3

If you don’t have an emergency fund, include a category for “surprise expenses” that might pop up over the month and derail your budget.

Start assigning a spending value to each category, beginning with your fixed expenses. Then, estimate how much you’ll need to spend per month on variable expenses.

If you’re not sure how much you spend in each category, review your last two or three months of credit card or bank transactions to make a rough estimate.

5. Total Your Monthly Income and Expenses

If your income is higher than your expenses, you are off to a good start. This extra money means you can put funds towards areas of your budget, such as retirement savings or paying off debt.

If you have more income than expenses, consider adopting the “50-30-20” budgeting philosophy. In a 50-30-20 budget, “needs,” or essential expenses, should represent half of your budget, wants should make up another 30%, and savings and debt repayment should make up the final 20% of your budget.

If your expenses are more than your income, that means you are overspending and need to make some changes.

6. Make Adjustments to Expenses

If you’re in a situation where expenses are higher than income, find areas in your variable expenses you can cut. Look for places you can reduce your spending—like eating out less—or eliminate a category—like canceling your gym membership.

If your expenses are far above your income, or you have significant debt, reducing your variable expenses may not be enough. You may need to trim your fixed expenses and increase your income to balance your budget.

Aim to have your income and expense columns to be equal. This equal balance means all of your income is accounted for and budgeted toward a specific expense or savings goal.

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