The information in this article is up to date through tax year 2019 (taxes filed in 2020).
If you are just exiting college with your first full-time job, changing your spending and saving plan in preparation for a new home or baby, or just want to keep a closer eye on your financial affairs, the first thing you need to do is create a budget. A budget is a financial plan that lets you know where you stand financially. It’s an estimate or a projection of your monthly spending, income, and saving. With a budget, you’ll have a better understanding of what you spend, how often you spend, and what you spend money on.
How To Build Your Monthly Budget
- Gather any bills, pay stubs, receipts, or other financial paperwork. Having this information at your fingertips will make building a budget easier and less stressful.
- Figure out your monthly income. Use a paystub to see what amount you actually take home after taxes and other expenses, like insurance or a 401k payment.
- Look at your bills and add up your necessary expenses. These are typically rent, water, power, car payment, insurance, etc. Start with bills that are fixed amounts, like your rent or mortgage. Then move on to bills that fluctuate from month to month, like utilities. Estimate these amounts when adding them to your budget.
- Estimate costs for nonessential miscellaneous expenses. Put items like entertainment, dining out, and other hobbies that you regularly spend money on here.
- Find any outstanding expenses. This can be purchases like holiday spending, car maintenance, vacations, or a savings goal that you have. If these expenses do not occur monthly, add up an estimated annual cost and divide it by 12 to add it to your monthly budget. This way you can plan to save a little each month to make it easier when these expenses do happen.
- Add up the totals. Now that you can see which expenses belong in each category, add them all up to see if they are less than or equal to your monthly income.
- Cut some expenses if you need to. If your total amount is greater than your monthly income, see if you are spending more than you would like in one area, like dining out. Cut down on some of the miscellaneous or outstanding expenses to meet your budget.
Why is having a budget important?
A budget can help you set—and hopefully reach—your financial goals. Once you know how much money you have compared to how much you spend, you can set some personal goals. Maybe you’ve always wanted to travel to Ireland. Maybe you need a second car. Or, like others, you want to build up that emergency fund.
A budget allows you to do the things you want. It gives you options. And with options comes financial freedom.
A common goal when creating a budget is to save money and erase your debt. Start by taking a closer look at your finances. Do you spend more money than you make? Do you spend money on non-essential things? Are there areas of spending you know you want to cut back on? A budget can help you find a solution to these questions.
How should I use my budget?
Use your budget to track your expenses. The best way to track every expense is to save your receipts for every transaction over a three-month period. Expenses include housing costs (utilities, rent/mortgage), Internet, phone, food, transportation (public and private), pets (food, vet bills), health care, school (books, tuition), entertainment, clothes/shoes, child care, child support, and insurance (health, car). Other expenses might include magazine or software subscriptions, or any online recurring payments. Remember to include extracurriculars like dance classes for your kids or sports (fees, uniforms).
Review your budget periodically to see where you’re spending the most money. For example, let’s say a large percentage of your income is spent dining out. Dining out is great, but it is not a necessity. The little extra you save could go toward bigger student loan payments. And paying off your student loan could be a top financial goal for the year!
It’s also important to revisit your budget after you get a new job, move to a new location, or have a new family member in your household. All of these life events will alter what your income and spending will look like, so you must adjust your budget to accommodate these changes.
Where should I keep my budget?
If you don’t trust your handwriting or math skills, there are other options outside of paper-and-pencil budgets. The most important thing when creating a budget is to make sure the method fits your lifestyle and preferences.
A simple Google search for “free budget template” will yield hundreds of results. Many people prefer an Excel spreadsheet for their budget because the sheet is formatted, the formulas are built into the spreadsheet, and the income and expense calculations are automatic.
If you’re more digitally savvy and prefer your mobile device, you can choose from several personal finance apps that help you track your spending. These apps sync up to your bank accounts to gauge your spending habits and help you reach your savings goals.
Tip: Remember to include your tax refund as part of your income. Not sure how much money you’ll get? Use our free refund estimator as a guide. Then, plug that number into your new budget.