How to Make a Budget: Step-By-Step Guide
Updated December 3, 2019 . AmFam Team
Not sure how to budget? Although it may seem complicated, it’s really pretty simple when you break it down. Essentially, it’s giving every dollar you earn a job, so you know exactly where your hard-earned money is going. Creating a budget is a really important step in accomplishing your financial dreams, and we’re here to help you learn how! In this easy-to-follow guide, we’ll go over how to calculate your monthly expenses and income to create a budget that works for you.
Calculate Your Expenses
First things first, you’ll need to understand how much money you’re spending each month in order to know just how to calculate your budget. To get started, make a list of all the consistent expenses you have monthly — things like groceries, rent/mortgage payments, health insurance, car payments and other recurring bills. Then, estimate out some of the more flexible expenses, like clothing, dining out and fun money. And don’t forget to list expenses for your savings goals. Want to make sure you’re not missing anything? This budget calculator (Opens in a new tab) can help make sure you’ve considered all your monthly expenses.
Calculate Your Monthly Income
The next step is determining your monthly income. Knowing how much you’re actually bringing in after taxes are deducted will help you determine how to budget your money. Don’t forget to include any income you get aside from your main gig — like part-time jobs, freelance pay and any other ongoing income. Want help laying it all out? This tool (Opens in a new tab) can help.
Create a Budget Plan
Now that you have a good idea of what your income and expenses are, it’s time to create a budget. However you choose to go about it, you’ll want to make sure it accounts for all of your needs and savings goals, and leaves some room for your wants as well. At this stage, there are two things to keep in mind: 1) you should be realistic — having goals is important, but you don’t want to be too strict, so leave some wiggle-room for yourself, 2) budgets can change! Whatever you set today can be tweaked, and money can be moved around if absolutely necessary, so don’t get too caught up on getting it perfect right away. As long as you’re recording and tracking your expenses, you’re on the right path.
50/30/20 rule
Although this rule isn’t absolute, it’s really helpful to consider when it comes to creating a budget. The 50/30/20 budget rule (Opens in a new tab) states that 50% of your income should go towards your needs (think housing, food, transportation, insurance and other ongoing bills), 30% should go towards your wants (like shopping, vacations and entertainment) and the remaining 20% should go towards your savings goals (saving for a house, building an emergency fund, 401(k) contributions, etc.).
Not sure how to make a budget? There are plenty of tools out there that can guide you and help hold you accountable throughout the month. Take a look to determine what budgeting tools might work best for you! And be on your way to better money management in no time.
This article is for informational purposes only and based on information that is widely available. This information does not, and is not intended to, constitute legal or financial advice. You should contact a professional for advice specific to your situation.
Related Articles
- Ways to Save Money for a Family Trip
Among the many joys of being a parent is the opportunity to share your passions with your children. From exploring your favorite hobbies to diving into cherished family recipes, as your kids grow so do the memories you create together.
Going on vacation with your children is a great way to bond with them, but it can get costly. The good news is that getting out of town doesn’t have to break the bank. Plan for your next family adventure by exploring the tips in these family vacation FAQs.
- Credit and Identity Theft Monitoring
Protecting your home with a security system and locking your doors when you leave for the day are measures you might take to protect your home from intruders. Credit and identity theft monitoring are a type of “security system” that protects you from intruders gaining access to your personal information. From credit fraud to identity theft, everyone is susceptible to these types of breaches — that’s why it’s so important to defend yourself against them.
Credit monitoring and identity theft protection are two different ways to proactively protect yourself if your personal information gets into the wrong hands. Let’s take a look at the differences and why it’s important to implement them both together.
- Saving for a House
There are a few defining moments in our lives. For some, it’s the realization that buying that first home is within reach, both financially and emotionally. It’s a big step, and it’s one that’s built into the American dream. And if you’re left wondering how much money you should save before buying a house, you’re not alone. These costs can add up quickly.
After you’ve made the big decision to start shopping for a home, you might be surprised to find that coming up with the cash down payment is only one of several financial hurdles you’ll need to clear. Exactly how much you should save for a house depends on a number of factors, like the value of the home you’re targeting and the amount of money you intend on pushing into your down payment.
- Pay Off Student Loans or Buy a House?
After college, life moves fast. You get your first big job, move out of your parents’ house and start a whole new life on your own. For most people, this also means paying off student loan debt from your college tuition. Having this debt may make big milestones like buying a house seem far off, but there are ways to make the leap from renter to homeowner even if you have student loans. So can you get a mortgage while also paying off student debt? Or should you wait to pay it off before you buy a house?
Every situation is different, so it’s important to do the right research and choose the best option for you. Luckily, we’ve done some of the breakdown for you to help you decide whether to pay off your student loan entirely or buy a house.
Can Student Loans Affect Buying a House?
Typically, student loan debt doesn’t prevent you from getting a mortgage. The biggest thing to note is that student loan debt does influence your debt-to-income ratio, which is a factor lenders consider before giving you a loan. It can also affect the interest rate you pay on your mortgage.
Buying a house with defaulted student loans
If you’ve defaulted on your student loans, it’ll be more difficult — but not impossible — for you to get a mortgage. Because defaulting negatively affects your credit score, lenders will be less likely to want to give you a loan or will charge a much higher interest rate on a loan.
Getting a home loan with student loan deferment
If you’ve deferred your student loans, this usually won’t affect your chances of getting a mortgage. Just be sure to consider how the future estimated payments will factor your debt-to-income ratio. Some types of mortgages may reject applicants with deferred loans, so do your research on the different types of mortgages before shopping.
Should You Pay Off Student Loans Before Buying a House?
Buying a house is expensive, there’s no doubt about that. It can seem smart to hold off on house shopping while you still have student loan debt, and it can be even more difficult to save for a house if you’ve got a high debt-to-income ratio. But if you have enough income to handle the payments for both, you may want to consider investing in your first home.
Signs You Should Pay Off Student Loans
When considering whether to pay student loans or save for a house, there are a few factors that can help you decide if paying off your student loans should be a priority.
Your debt-to-income ratio is too high
If the amount of money you bring in monthly or yearly is almost the same as the amount of money you pay out in debts — like student and car loans or credit cards — it may be best to pay down your debt before buying a house.
You’ve defaulted on your loans
Defaulting on your loans has a severe negative impact on your credit score, which tells lenders that you’re a bigger risk to take on. Work on improving your credit score before shopping for a mortgage.
You’re struggling to make payments
If you feel like you’re living paycheck to paycheck or struggling to make payments on your loan every month, it’s best to hold off on saving for a house. Need help keeping track of your student loan payments? Try our student loan payment tracker to get organized.
You haven’t saved for a down payment or emergency fund
Before you start picking out which houses you want to tour, you should take a look at your savings. If you don’t have enough for a 5 to 10 percent down payment or enough as an emergency fund for home expenses — like a broken dishwasher or damaged roof — take more time to put money away for your first home.
