Step one is to document your income and expenses, using tools such as pay stubs, bank statements, budgeting apps, or online templates like First Bank’s free MyMoney tool for online and mobile banking. Start by listing your monthly fixed expenses, such as rent, utilities, and debt payments, before expanding on variable expenses, such as groceries and entertainment.
1. Track Your Spending
No matter if it is done through a spreadsheet, app, or pen and paper, keeping track of expenses is vitally important to gaining an accurate picture of your finances and making informed decisions.
Start by listing all of your monthly spending, from rent or mortgage payments and groceries to car payments and car lease payments. Categorizing each expense as a need, want, or goal (like paying down debt or saving for vacation). Aim to allocate 50% of take-home pay toward needs, 30% toward wants, and 20% toward goals before adjusting as necessary.
2. Know Your Needs vs. Your Wants
Understanding the difference between needs and wants when creating a budget is essential to its success. A need is any expense that must be met for long periods, like food or housing; on the other hand, wants are expenses that add quality of life but are not necessary for survival, such as dining out or buying new vehicles.
Separating expenses into these two categories can help you identify expenses you should reduce or eliminate, such as subscription services and unnecessary clothing purchases. It will also allow you to prioritize spending and set financial goals.
3. Create a Budget
There are various approaches to budgeting. Find one that best fits with your lifestyle and then revisit it regularly. Start by estimating your monthly expenses. You can do this by reviewing bank and credit card statements from the past three to six months and isolating regular recurring charges (like rent or utilities) from those that only occur occasionally (like eating out, gifts, or gym memberships).
Next, it is important to determine your net income (the remaining wages or salary after taxes and employee benefits have been deducted), which should go toward fulfilling your needs and desires.
4. Review Your Spending
Record all your spending for several weeks or months using any method you prefer, whether that be an app, spreadsheet, personal finance website, or pen and paper. Be sure to include both ongoing expenses like subscriptions as well as one-off purchases made using peer-to-peer payment apps like PayPal.
Reevaluate and categorize your expenses, noting fixed (i.e., mortgage or rent payments, utilities payments, insurance premiums, and debt payments) and variable expenses such as food, shopping, travel, and entertainment costs. Be sure to review past bank statements for trends that could assist with estimating future recurring expenses, particularly if your income or lifestyle fluctuates month-by-month. This step can prove especially helpful.
5. Automate Your Savings
Saving can be challenging, but it’s essential for meeting long-term financial goals like retirement, buying a home, or attending college. Automating your savings may make the process more manageable while eliminating temptation.
Start by keeping a log of your spending for several weeks using an app, spreadsheet, or pen-and-paper budgeting program. Deliberate your expenses into necessities (like rent or mortgage payments) and wants (like gym memberships or dining out). Next, decide how much of each paycheck you want to save automatically through automated transfers—then monitor progress. If you find success, increase savings even more.
6. Automate Your Expenses
Start by recording your spending for several weeks using any method that works for you—smartphone apps, budgeting tools, simple spreadsheets, or pen and paper are all viable choices—including all fixed expenses like rent/mortgage payments, utility bills, transportation, and insurance premiums, as well as variable expenses such as groceries, dining out, and gifts.
As for variable expenses, try estimating costs or reviewing past credit card and bank statements as guidance for variable expenses. If any money remains after covering necessities, apply it toward debt repayment or savings plans.
7. Set Goals
Reaching your budget goals becomes much simpler when you set an objective. Start by assessing your take-home income and listing expenses; divide these into fixed and variable costs using pay stubs, bills, invoices, or bank statements as evidence.
Next, list any debts and savings goals. Make sure to include a debt repayment plan with an estimated timeline as well as any savings goals, such as vacationing or investing in new cars.
8. Make a Plan to Reach Your Goals
Before creating your budget, gather all of the documents that demonstrate your income—pay stubs, bills, credit card and bank statements can help demonstrate this information. Before creating a budget, it’s essential that you outline all of your expenses. Break them down into fixed and variable expenses; fixed expenses typically remain constant each month, such as rent or utilities, while variable ones, such as gym membership or dining out expenses, can fluctuate more freely.
Finally, take time to assess and prioritize your goals. Create both short- and long-term plans, and decide how much of your income you will dedicate toward each. In addition to saving and investing for the future, setting short- and long-term plans may also be worthwhile.
9. Take Action
Personal budgets may seem restrictive, but they are an invaluable tool for managing finances. A budget ensures you remain in control of your spending by ensuring the amount coming in is greater than what goes out. First calculate your total monthly income (typically your net paycheck after taxes and employee benefits are deducted), then estimate expenses and subtract them from income to determine your expense totals.
Utilize tools such as a spreadsheet or budgeting app to save both time and improve accuracy, then allocate any leftover funds towards saving or paying down debt until your balance is zero.
