By now, you know why you need a budget, and you know what components make a budget successful. But how do you take this information and put it to work? It’s actually not as difficult as it may seem. To begin budgeting, all you have to do is follow a few simple steps.
Step 1: Gather Your Materials
It’s important that your budget exists somewhere other than your mind, but you are free to select whichever medium you believe will work best for you. I use a spreadsheet in Microsoft Excel or Google Sheets, but others prefer to handwrite their budgets using a good ol’ pen and paper. There are also apps such as YNAB and EveryDollar that are designed to make the budgeting process as painless and as helpful as possible, and are especially useful if you need to reference your budget on the go.
It’s also helpful to have access to any pay stubs and bank and credit card statements, typically from the last 3-6 months. You’ll be using this information as you begin building your budget.
Step 2: Know Your Income
The “real” first step in creating your budget is to know what you’re working with: your income. In some cases, knowing this number is simple, as salaried employees generally receive the same amount per paycheck. If you work freelance or variable hours or rely on tips or commissions, getting this number can be trickier. Here’s where your pay stubs will come in handy. Use this information to generate an average income for your budgeting period (monthly, by paycheck, etc.), which will become the framework for your budget.
Step 3: Calculate Your Expenses
Now that you know what’s coming in, you need to know what’s going out. Using your bank and credit card statements, make a list of your monthly expenses. These should include the necessities, such as housing, utilities, and groceries, discretionary purchasing such as restaurants and streaming services, and minimum debt payments. Some of these items will be fixed, such as your rent or mortgage, but others, like groceries, will be variable. Use the statements on hand to determine your average monthly spending on these variable categories. You can later break this number down further if you’re budgeting by paycheck rather than by month.
Step 4: List ALL Debts
Now, the not-so-fun part: chronicling your debt. While you should be including any minimum monthly payments in your list of monthly expenses, it’s important to also note the total balances of these debts, as well as their interest rates. This information will help you better determine which debts to begin attacking first, and which are eating away at your income more than is necessary.
Step 5: Determine Your Financial Goals
Though you may not be contributing to savings right away, it’s important to have goals in mind when creating a budget, as they’ll help keep you motivated throughout the process. Whether you want to save up a solid emergency fund, enough money for an exciting vacation, or a nest egg to tap into come retirement, visualizing these goals will make it easier to make some potentially difficult cuts from your everyday spending.
Step 6: Look at the Big Picture
Now that you know your income, your expenses, your debts, and your financial goals, you have a clearer understanding of your financial picture. If you’re making $2,500/month and spending $2,000, congratulations! You’re on the right track, and just need to make sure that you’re using your $500 surplus to actively help you reach your goals. But if you’re making $2,500 and spending $3,000 per month, you need to begin making some changes.
Step 7: Make Adjustments
Generally, things won’t look very pretty the first time you go about creating a budget. You’ll discover that you’re overspending in certain categories, or your debt balance is higher than anticipated. Now’s the time to begin making adjustments. Sometimes these are small changes, such as spending less money at restaurants and bars or reducing the number of times you buy new clothing. Some may be bigger, such as moving in with roommates or moving to a new location to help cut down on costs. And others may not be focused on lowering costs, but rather on raising income, finding work that can supplement your normal income.
Step 8: Don’t Give Up!
Budgeting isn’t easy at first, but it won’t always be that way. Remember that as you work through your budget over the first few months. There will be times that you continue to overspend. There will be unexpected expenses. But you shouldn’t let these setbacks discourage you; instead, learn from them and let them fuel you even more. Continue to search for ways to manage your expenses and your income that will allow you to work towards your financial goals. Continue to check in with and hold yourself accountable for maintaining your progress. Soon enough, budgeting will feel natural, and you’ll feel more confident and better equipped for life’s curveballs.
Big City, Small Budget 