A budget is a plan you make to decide how much you should spend and save based on your income. Making a budget—and sticking to it—can set you up for financial stability by helping you spend less and save more.
But we all live busy lives and have unique goals. It can be hard to create a budget that works.
Luckily, a few simple steps can help you get on the right financial track by setting a clear and easy to follow budget.
Why Do I Need a Budget?
A budget can help prevent overspending and encourage saving money. A good budget is not a promise to stop spending entirely. Instead, it is a way to plan your spending better.
Without a budget, it can be easy to spend more money than you should, because you have no way of knowing for certain how much you should spend based on how much you make. Spending can also sneak up on you, and you risk spending too much before you realize that you need to dial back. This could create financial problems if your income cannot cover your expenses.
Having a budget can also help you get rid of debt by shifting your spending habits, allowing you to use more income for monthly payments or to get ahead of interest by paying off debt quickly.
How Do I Make a Budget?
Your budget can be as detailed as you want it to be. You could create a general spending limit and a savings goal for every month, or a detailed spending plan, breaking up your expenses into categories like bills, entertainment, and dining to save the most you can. You could even let a Digital Banking service make a budget for you.
However you decide to do it, it is important to build a budget that fits your financial needs and is simple to stick with.
What Are the Basic Steps for Building a Budget?
Making a budget may feel daunting at first. Here’s a step-by-step guide to budgeting to help make it easier to manage.
- Determine Your Monthly Income
You will want to base your budget on your net monthly income. Net income, or take-home pay, is what you make after taxes are taken out. To find your monthly income, you can look at last year’s tax return and divide your net income by twelve (since there are twelve months in the year). You can also use an online salary calculator to help you estimate your monthly net income.
Budget-wise, your monthly net income is a general limit to how much you can spend and save every month.
- List Your Expenses
To find your expenses, you can check your bank account and go through last month’s spending history. When listing your expenses, include everything you regularly spend money on. Examples of expenses include:
- Rent or Mortgage
- Bills
- Entertainment
- Dining Out
- Shopping
- Groceries
- Auto and Transport
Add up your expenses for the month, and keep this number close by as you make your budget.
- Determine Necessary and Unnecessary Spending
By organizing your spending, you will be able to create a detailed budget that fits your lifestyle and needs. This makes it more likely that you will follow your budget, because it is tailored for you.
Necessary expenses (also called fixed expenses) are bills that that you need to pay such as:
- Rent or Mortgage
- Bills
- Required Debt Payments
- Groceries
Unnecessary spending (also called variable spending) includes:
- Entertaiment
- Dining out
- Extra shopping
- Vacations
Divide your expenses into these two categories, and move to the next step. - Subtract Total Expenses from Total Income
Subtracting your expenses from your income will give you a picture of your financial health. If you have money left over, you are probably not overspending on average. If you have little-to-no money remaining, it might be time to adjust your spending habits.
For example, say your current monthly expenses look something like this, and your monthly income is $3,000:
- Rent: $1,500
- Bills: $500
- Groceries: $200
- Gas: $200
- Entertaiment: $200
- Restaurants: $100
- Debt Payments: $200
Total Expenses: $2,900
$3,000-$2,900= $100 remaining.
If your budget looked like this, and you wanted more money left over every month, you could make spending limits to help you save more.
- Make Spending Limits
If your goal is to save money, consider spending less on variable expenses. This could be canceling an extra subscription service, or using a ride share service less when you go out on the weekends.
It may also be an option to find ways to cut back on necessary expenses, such as turning down your AC to lower your electric bill or using coupons when you shop for groceries.
There is no right way to organize your spending, but working to spend less in ways that make sense for you will give you more leftover money at the end of every month.
It is important to keep your spending limits realistic, though. For example, do not completely cut out entertainment or dining out, because it is unlikely that anyone would follow this strict of a rule. By controlling (not completely stopping) spending, budgeting can allow you to have fun while keeping track of how much you spend, preventing you from spending more than you make.
- Stick to Your Budget
A great way to stick to your budget is to track your spending. Keep your budget handy (on your phone, for example), and when you make a purchase, subtract its dollar amount from how much you have allocated for that category in your budget. This will help you stick to your spending limits.
For example, if you saw a movie, you would subtract the ticket (and maybe popcorn and candy) cost from your entertainment category.
If your budget has a more general spending limit, you can add a reminder into your bank or credit accounts for when you hit a spending threshold.
Want to make it easy? CU1 Digital Banking has easy-to-use tools to help you track spending and make a budget. If you have not registered for Digital Banking yet, you can register here.
Not yet a CU1 member? Open an account online, in person, or over the phone in minutes.