How to Make a Budget
You’ve got dreams and you’re determined to achieve them. But before you begin tackling your goals, one of the biggest steps you can take to help you move forward is to learn how to make a budget. Being savvy about your finances helps you set realistic expectations, and once you’ve got a firm grasp on your money, you’ll have more control to bring those dreams to life.
We’ve pulled together some tips that will help you get started creating your own personal budget. Since everyone’s lifestyle is different, these tips are meant as a guide and can be adapted to fit your unique situation. Let’s get started!
Your Guide to Become a Budgeting Pro
Start with your income. The first step to any budget is determining how much money you actually have to work with. Whether you get paid a salary or by the hour, remember that a certain amount of your gross income — the amount you earn before taxes and other deductions — is not what you’ll use for budgeting. The actual income you’ll use to create your budget will be your net income — which is the amount after taxes and other deductions. You can easily find your net income by looking at your take-home pay. How much are you putting into your checking and savings account each month? That’s the number you’ll be working with.
Money tip: Do you have multiple jobs or jobs where you get paid cash (i.e. serving, bartending, etc.)? Make sure you’re adding up all money that’s coming in so you can create the most accurate budget.
Make a list of your fixed expenses. A fixed expense is basically any expense you pay that is consistently the same price from month to month. Create a list of bills that you pay every month that are typically the same amount — these form the base for your budget. Here’s a list of common fixed expenses:
- Mortgage or rent
- Property taxes
- Homeowners insurance
- Car insurance
- Lease/car loan payment
- Utility bills (cable, cell, electricity, water, etc.)
- Life insurance
- Health insurance (sometimes this is taken out of your paycheck)
- Condo fee
Money tip: Once you add up your fixed expenses, subtract the total from your net income and the remainder is the amount you’ll have for your fluctuating bills.
Review your fluctuating bills. You probably have several bills you pay each month with varying amounts, or costs you spend for necessities or entertainment. If you’re looking to cut back on your spending, your fluctuating bills are a great place to start. Fluctuating bills usually include the following:
- Credit cards
- Grocery expenses
- Personal care items
- Eating out
- Clothing and shoes
- Kid’s lessons and activities
- Sports and recreation, other hobbies
- Hair care
- Any other expense you think fits in this category
For budgeting purposes, take a look at your bills from the last few months, add them up and find the average. For example, take all of your grocery bills for the last three months, add them together, then divide by three (total number of months) to find the average amount you spend each month.
Money tip: Looking for ways to organize your finances? There’s an app for that! Mint: Money Manager, Bill, Credit Score & Budgeting is a great way to manage your money. You’ll connect your bank accounts, credit cards, bills and investments so you can track all of your expenses in one convenient place. Download it to your phone and have your budget at your fingertips!
List your financial goals. Think about all of your long-term and short-term financial goals, and then prioritize them. If you need a new car, then this short-term goal may be your first priority. If starting your own business is your dream, then you may need a long-term approach. Your goals will help you stay motivated to stick to a budget!
Money tip: Write down your goals and be specific. Instead of saying, “I want to save for a car,” make your goal, “I want to save $5,000 for a car by this date.” Having a number in mind makes the goal more realistic and doable. And writing it down with an end date gives you a constant reminder that will help bring it to life.
Gather the data and make adjustments. Now it’s time to take a good hard look at your income, your expenses and your financial goals. Are you saving where you should or are there places you’re over spending? Can you cut back on grocery bills by buying off-brand items? Do you really need over 100 TV channels? How about that daily specialty coffee drink that costs you close to $30 a week — maybe it’s time to kick that habit? Dig deep into your spending habits and cut back on the places that offer momentary satisfaction instead of helping you meet your long- and short-term goals.
Money tip: Want to adjust your spending habits to make sure you hit your goals? Try tracking every single penny you spend for a month (apart from those fixed expenses). From a pack of gum to dinner out with friends, write down every time money leaves your wallet. You might be shocked at how quickly little expenses can add up and tack on more time to reaching that end goal.
Review and follow. Making a monthly budget is a great first step but it really only works if you follow and review it frequently. If you have a family, gather everyone and get them in the same “money mindset”. Is it just you? Talk to a friend to hold you accountable. It may take some time to get used to, but being diligent about sticking to your budget will pay off — literally!
At American Family Insurance, we’re all about encouraging people to pursue their goals. And making a monthly budget is a step in the right direction. You may even be able to save on your insurance! Check with your agent to see if you qualify for any discounts. Happy savings!
The information in this article is for informational purposes only. It should not be considered legal or financial advice. You should consult with an attorney or other professional to determine what may be best for your individual needs.