Creating a personal budget

Creating and Using a Budget

Creating and using a budget is something everyone can benefit from and do. Budgeting is a powerful process that can help you develop a financial plan and build financial capability and empowerment.  

What is your perspective on budgeting?

Your success with budgeting may depend on your perspective. Some think budgets are meant to be restrictive, take the fun out of life, and make you feel shameful about spending. Others may view budgets as too time consuming to make or too difficult to follow.

In reality, budgeting is an empowering process. It puts you in control of directing your money towards what you really want in life, including having fun. With this in mind, taking the time to create a realistic budget you can follow will be well worth it.

What is a budget? What is the budgeting process?

A budget is a written plan for how you will spend and save your income each month. Budgeting includes:

1. Identifying your priorities and goals
2. Creating a budget document that outlines your estimated monthly income and expenses
3. Tracking your actual spending and income
4. Making adjustments to the plan

Why budget? Budgeting helps to:

• Put you in control of your money and ensure it is being used to meet your needs and achieve your goals
• Show you where your money is going and reduce wasteful spending
• Improve your ability to pay all of your bills and not run out of money during the month
• Free up money to pay down debt
• Save for things you really want
• Reduce stress and build confidence
• Better prepare for emergencies

Five simple steps to create and use a budget

Creating and using a budget can be simple. Follow these steps to build and use a budget that works for you. This budget tool may be useful in creating your budget.

Step 1: Estimate your monthly income

List your sources of income and how much you expect to receive on a monthly basis. Income sources may include your paychecks, child support, pay from gig work, Social Security income, etc. If your paycheck amounts differ each period, estimate conservatively to set yourself up for success. Let's use an example:

Step 2: Identify and estimate your monthly expenses

What do you spend your money on? Start by estimating your fixed expenses, which are those that are the same amount each month. Your rent or mortgage, cell phone bill, and garbage bill may be examples of fixed expenses. List each expense and how much it costs. Next, identify your variable expenses, which are those with different dollar amounts each month. Groceries, eating out, gifts, clothes, and gas are examples of these types of expenses. Estimate how much you spend on these each month. Looking at past credit card or bank statements can help you to accurately estimate amounts. Don't forget to budget for expenses you may pay annually. To budget for these, divide the expense by 12, then put aside that amount each month. When finished, calculate your total estimated monthly expenses. See the example below.

Step 3: Compare your total estimated income and expenses, and consider your priorities and goals

Now, compare your total estimated income to your total estimated expenses. If your expected monthly income is greater than your expected monthly expenses, you expect a surplus. That's great! In the example above, the person expects to receive $3,000 and spend $2,700 each month. There is an expected surplus of $300 per month.

This is a good time to discuss financial priorities and goals. What are the things you want to achieve with money – to save or invest for? Budgeting is exciting when you are able to maximize the amount you direct towards your goals and can see yourself making progress. Short-term goals to save for may include building an emergency fund or saving for a vacation. Long-term goals may include saving for a home or investing for retirement.

Once you have determined your goals and priorities, consider how much you will direct to those goals on a monthly basis. In the example above, the person decides to save $100 each month to add to an emergency fund. The person also chooses to contribute $200 a month to an investment account. Ideally, work to save and invest 10 percent to 20 percent of your monthly income. In the example, the person is planning to save/invest 10 percent a month ($300/$3,000 = 10 percent).

If you expect your expenses to be greater than your income, you expect a deficit. To address this, you will either need to reduce your estimated expenses or increase your expected income. Make decisions that will bring your budget into balance. For example, can you find a way to spend less on groceries or entertainment each month? Or, can you get a second job to earn more money?

Step 4: Track your spending, and at the end of month, see if you spent what you planned

Devise a system to record your spending for the month to see if you are staying within your budget. At the end of the month, use the data to adjust your budget or adjust your future spending. Did you have spending leaks you did not account for? Do you need to create a new budget category? Do you need to adjust the amount you budget for certain expenses? Do you need to cut back on some expenses? Did you meet your savings goals?

Budgets should be adjusted over time. Ask yourself, “Am I spending and saving my money in the way I truly want to?" “Am I meeting my needs and working to achieve my goals?" If you have more unspent money on a monthly basis, consider how to adjust your budget to redirect this money to achieve more goals or to achieve goals sooner than expected.

Step 5: Stick with it

Tracking spending, plugging spending leaks, adjusting your budget, and saving money becomes a habit over time. Set yourself up for success by:

1. Setting realistic and achievable expectations and goals
2. Creating a budget and tracking system that is easy to use and maintain
3. Automating saving and investing by setting up recurring transfers to savings or investment accounts
4. Using strategies to reduce impulse purchases and build self-discipline

As you practice, build habits, make adjustments, and start seeing results, you will be more empowered to reach your goals.

For further learning, check out these budgeting resources:

Federal Trade Commission: Making a Budget
Federal Trade Commission: Make a Budget Worksheet fillable PDF
Federal Trade Commission: Budgeting Video