A Step-By-Step Tutorial on How to Make a Budget

Creating a budget in a notebook planner

Managing your finances is often much easier said than done. Sometimes, no matter how hard you try or how good your intentions are, actually making an accomplishable budget can seem practically impossible. Like many Americans, you likely have a general idea of how much you’re making versus how much you’re spending. When it comes to actually creating a legitimate on-paper financial plan and identifying aspects of your budget that can be improved, however, you always fall short.

If you’re financially frustrated or are looking for help making a financial plan you can follow, turn to this step-by-step tutorial on budget planning.

Step 1: Know what you’re working with

Before you build a house, you need to know what materials are available to you. The same concept applies to building a budget: you need to have a strict understanding of each and every aspect of your finances, both earnings, and spending. Documents you’ll need include:

  • Bank statements
  • Investment accounts
  • Monthly utility bills
  • Misc. income
  • Misc. expenses

In order to have a comprehensive understanding of your finances (like the blueprint of a house), you’ll need to gather all of your financial data, both incoming and outgoing.

Step 2: Organize your income

From side-gigs and stocks to bi-weekly paychecks and miscellaneous forms of income, your monthly earnings play an important role in creating a realistic, achievable budget. Keep in mind that some forms of income may be taxed by the state and federal government, in which case you’ll need to record your take-home pay (aka net income). Think of your income as the roof of a home: you have to have a roof to support the walls, which can only be as big as your roof will allow.

Step 3: List Your Expenses

Once you’ve divided your finances into earnings and expenditures, you’ll need to create subcategories of where your money is going. Types of common expenses include:

  • Mortgage payments
  • Personal loan
  • Car payments
  • Auto insurance
  • Groceries
  • Utilities
  • Entertainment
  • Student loans
  • HOA fees
  • Savings
  • Pets
  • Miscellaneous bills/costs

Go down your list and determine which expenses remain the same each month and which change from month to month. It’s the latter category – your variable expenses- that are key to budget building and saving money. Think of these subcategories as walls built beneath the roof: if they’re too many or too big in size, your roof won’t be able to support them and the house will become strained and at risk of collapsing.

Step 4: Calculate

By this point, you should have a thorough understanding of how much you’re making each month and how much you’re spending each month. Compare these totals. If your income is greater than your expenses, you’re likely already working with a good budget. However, in the event your expense total outweighs your savings, you’ll likely need to make some easy, yet critical changes to avoid facing future financial issues.

Step 5: Adjust your expenses

Having a specific idea of your income-expense ratio will allow you to identify financial aspects that can be changed for the better. Figure out where you can cut costs in your monthly spending by first reviewing your variable expenses list and taking an objective stance on how important each one is. Can you find lower insurance rates? Is there a bus, bike, or carpool you can take to work instead of using your car? How much money can you save at the grocery if use coupons, change your grocer, join a loyalty program, or adjust your expensive grocery list? Do you really need to be living in a large house as an empty-nester?

Though often difficult to answer, the questions are key when it comes to building a budget that’s not just easy to follow, but also one that will help boost your savings and help you meet financial goals.

With this 5-step guide, you’ll finally be able to confidently follow through on your budget and enjoy the freedom that comes with being financially independent. If you need professional help building your budget or are interested in getting pre-approved for a loan, contact Power Finance Texas, today.