Personal Budgeting Basics: Step-by-Step Guide to Starting a Budget

Between housing costs, groceries, childcare costs and car payments, it can feel like there is never enough money in the month. Here’s the truth: Most Americans live paycheck to paycheck, including 30% of those earning $250,000 or more. Here’s how to budget your money to ensure you don’t fall into the red.

How to Make a Monthly Budget 

First, take note that we are creating a monthly budget. Some people try creating weekly budgets, but this tends to fail them because the time period is too short. It forces them to reassess their budget every week, and people quickly fall behind. Monthly budgeting sessions are easier to manage and can provide a broader view of where your money is actually going.

1. Budgeting Basics Step 1: Determine Your Income

You should start your budget by finding your monthly, post-tax income. This should be net income from all sources, including your primary job and any additional income you earn on the side.

If any of your income is earned without taxes already withheld, you should account for this when you determine your monthly income. For example, if you earned $3,250 in post-tax income from your primary job, and also earned $1,000 a month in untaxed side work, you would have a total of $4,000 in post-tax income after applying a 25% tax rate* to the $1,000 in extra income. For the sake of simplicity we’re discussing an individual income, but if you’re married you’ll want to account for your partner’s income as well.

*This is an illustrative tax rate. Always work with a tax professional to ensure you effectively pay for taxes.

1. Budgeting Basics Step 2: List Your Expenses

Now that you’ve established your total income, you’ll need to come up with a complete list of expenses for your upcoming month. You’ll want to include everything you plan to spend money on, such as:

• Rent or mortgage
• Electricity
• Groceries
• Childcare
• Gas
• Car payment
• Student loan payments
• Hospital bills
• Insurance (car, renters, home, etc.)
• Car repairs
• Phone bill
• Cable/Netflix/Hulu/etc.
• Entertainment (including dining out)
• Donations/Charitable Giving
• Retirement
• Savings

Keep in mind, though, that every person is different and so are his or her monthly expenses. When creating a monthly budget, try to account for as many expenses as possible from month to month. You may have to pay an HOA fee, buy your kid's sports gear or pay for continuing education to maintain a professional certification. Leave room in your budget for unexpected expenses that may arise throughout the month — consider opening a savings account to put money away for unexpected expenses so that they don’t derail your monthly budget.

1. Budgeting Basics Step 3: Assign Income to Expenses

As with most things in life, making a monthly budget is all about choices. You’ll need to determine which expenses are necessary, and which are optional. When you understand the differences between a “need” and a “want,” budgeting your monthly income becomes easier.Consider trying the 50-20-30 budget rule. In this budgeting method, 50% of your income goes toward needs, 30% toward your wants and the remaining 20% is allocated to savings or debts. Some expenses, like your rent or mortgage, are necessary, but they don’t fluctuate from month to month. Go down your list and assign values to each expense. When you’re finished, there shouldn’t be any money left — your whole income should be assigned to expenses, savings or financial goals.

Making these decisions can be difficult. How much rent can you afford? How much money should you put toward retirement? The following are budgeting guidelines for a healthy bottom line:

• Work to build an emergency fund that could cover your expenses for three to six months.
• Focus on eliminating debt, starting first with the loans with the highest interest rates.
• Your rent or mortgage payment should equal 25 - 30% of your income.
• If you don’t own a home, you may want to work toward saving for a down payment.
• Aim to save 15% of your income for retirement.
  
  

As with all financial planning, your budget should be about accomplishing your financial goals, and these guidelines help with some of your biggest goals: getting out of debt, owning a home and saving for retirement. If your budget isn’t allowing you to accomplish these goals as fast as you would like — or at all — you may need to make changes. It might be cutting eating out, but it could be downsizing your house or car if a drastic cut is needed.

Don’t know what financial goals to work toward first? Talk to one of our financial advisors.

1. Budgeting Basics Step 4: Track Your Expenses

As you progress through the month, keep track of your actual expenses and make sure they align with the budget estimates you laid out at the beginning of the month.

Budgeting apps make it easy to track your expenses. There are numerous free budgeting tools online, but you can also create a simple budget spreadsheet. If you’d like to keep your budget at your fingertips, check out these budgeting apps:

• EveryDollar — An easy-to-use budgeting app that tracks your expenses as you go. There is a free version you can use or a paid version that links to your bank account to track purchases.
• You Need a Budget — Budgeting app with bank syncing, progress reports and alerts when you overspend. There’s a free trial for 34 days and then costs $14.99 a month.
• Mint — Links to your bank account, tracks expenses, pays bills and provides your credit score.
  
  

1. Budgeting Basics Step 5: Improve Your Monthly Budget

Starting a budget means learning how to live within your means. Your first few months could be difficult if you’ve never used a budget before. You may forget to add expenses or purchases to your budget worksheet. Don’t give up! With practice and persistence, it will become second nature to track your spending and you’ll be able to better forecast your expenses.

Personal Budgeting FAQs

What do I do if my income changes every month?

The best way to handle this situation is to budget for your expected minimum pay. So, if your income ranges from $3,000 to $5,000 a month, you’ll want to budget for an income of $3,000. This will reduce your risk, guaranteeing that you don’t run out of money. During your high months when you make more money, you can put more toward your mortgage, retirement or debt repayment.

What do I do for expenses that fluctuate each month?

You have two options for these expenses:

The first is to plan for the worst. If you think the most you could spend on gas in a month is $100, then budget for that. At the end of the month, if you’ve driven less than you thought you would, you’ll have the extra money left to go toward your goals.

Your second option is to pay the previous month’s bill during the current month. To illustrate, imagine you’re planning your budget for October and you need to add a line item for electricity. It’s likely that your September bill won’t be due until sometime in the first week of October. So, don’t guess at what October electricity will cost you; put the September bill into the October budget since that is when you will pay it. Although it fluctuates each month, you’ll know the exact amount you need to add to the budget.

How do I budget for larger expenses?

With practice, budgeting becomes second nature and larger expenses become easier to manage. If a large, unexpected expense comes up — for example, you need to replace your air conditioner — you can tap into your savings account to cover the cost. If you make saving a priority, you will have funds to cover emergencies when they arise. If you own your home, it’s always a good idea to have a separate savings account for major household expenses like this. Also, consider insuring for these instances with Residential Equipment Breakdown coverage, which covers you in the event of a mechanical failure or electrical breakdown.

Plan ahead for things like vacations and other major purchases. If you want to take a vacation and estimate it’s going to cost $2,000, you can start to factor savings goals into your budget. Add a line item for the vacation and start putting money away each month: $500 a month will have you ready in four months, $1,000 in two.

The same principle applies when you budget for a wedding, a house or a new car. No matter what it is, you can prepare ahead of time — most expenses aren’t a surprise. If you have 200,000 miles on a car from 2010, you’re probably going to need to budget to replace it soon. Start saving money each month so you can be prepared when the time comes.

How do I determine my financial goals — and which should I budget for first?

It’s hard to say without knowing your exact situation, but we can help! Contact your local Farm Bureau agent or financial advisor today.