Budgeting can seem scary, but it’s really a matter of tracking the past and planning for the future. If you don’t know how to make a budget, don’t worry. You’re one of the 60% of Americans who don’t use a budget to track their expenses, according to a study by U.S. Bank. Knowing how to make a budget is the most important way to gain control of your finances and to get out of debt. Ready to learn?
Five Steps of Budgeting
Record All of Your Income
The first step to creating a budget is to calculate how much money you have coming in each month. This means you need to know what your net income is. Net income is your total pay minus deductions like taxes, insurance, and 401(k) contributions. You can look at your last paystub to find your total net income.
Freelancers and part-timers need to know how to manage their irregular income while accounting for taxes. If you’re self-employed, make sure to set at least 25% of your gross income aside for tax time.
Write Down All of Your Expenses
The second step in learning how to make a budget is to keep track of where your money is going. Make categories for your expenses so you can organize it in a way that makes sense to you and you can assess your overspending and underspending tendencies.
It’s helpful to list your expenses into two main categories:
- Fixed expenses: expenses or costs that do not fluctuate every month and the bills cannot be changed, including rent, insurance, payment on loans, and utilities.
- Variable expenses: daily spending like dining out, gasoline, clothing, drinks, movie tickets, etc.
Start by listing every fixed expense you have. It can help to look at your bank statement in order to track a month’s worth of expenses. Some sub-categories of fixed and variable expenses can include:
- Health care
- Dining out
After you’ve created categories that make sense for your spending habits, take the time to evaluate your spending. As a general rule, you shouldn’t be paying more than 30% of your net income on housing and no more than 15% of your net income on your car. If you find out you’re overpaying in housing, consider getting a roommate or moving to a cheaper place.
Last, list all of your variable expenses. These change every month and will give you a snapshot of the areas where you spend more than you expect, like dining out or on drinks. A reliable place to check your variable expenses is on your bank or credit card statements. Keep in mind some of your “fixed” expenses might not be fixed at all. For example, utility bills can be influenced by using smart home technologies to reduce your energy usage.
Set Financial Goals
Make a list of all of your financial goals. Do you dream of buying a car? Owning a home? Finally being debt-free? Think of the goals you want to achieve in the short term, such as paying off a credit card, and write them down. Then, think of goals you want to achieve in the long term, such as paying off your student loan debt or owning a home and write those down, too.
Part of learning how to make a budget is learning to appreciate your money and what it can do for you. Budgeting gives you the ability to control your finances in such a way that you can make your money work toward your goals.
Some smart financial goals include:
- Creating an emergency fund. Put away regular contributions to a savings account so you can build up three to six months’ worth of expenses. That way, you won’t be like the nearly 50% of Americans who would have to borrow money or sell something quickly to round up $400 to cover an emergency.
- Saving 20% of your net income each month. This will go a long way toward helping you reach your financial goals.
- Create a debt repayment plan. Make additional payments toward paying down credit card and student loan debt. This will help you become debt-free faster.
Track Your Spending
Many people start by tracking all of their purchases for two to four weeks when first learning how to make a budget. You can do this on Google sheets, in an app like Mint or with pen and paper. The most important part about tracking spending is that you take a disciplined approach. Make a mental note that every time you reach for your wallet, you should also track what you’ve spent.
After you’ve created a budget and tracked your spending you should compare how your actual spending habits match up with what you’ve allocated for in your budget. Look for discrepancies and see where you need to adjust the amounts.
Also check for areas of overspending or underspending in comparison to your goals. Do you have a goal of being credit card debt-free, but you keep buying new clothes with credit? You need to start making your actions match up with your intentions so you can finally achieve your goals.
Make Adjustments That Take Your Life into Account
After you’ve tracked your spending, you’ll want to make sure your income and your expenses are equal. If they aren’t equal, then find areas where you can make cuts in the variable expenses category.
Carefully consider areas that you can cut back by following the SMART system for reducing expenses:
- Specific – Make sure your goals are specific. For example, “I will reduce my alcohol budget by 30% next month.”
- Measurable – Find a way to measure if you met your goal. Do this by tracking your expenses to find out where you were successful and where you need to be more disciplined.
- Actionable – Make sure there is an action indicated in your goal. “I will dine out less” has less actionable meaning than “I will reduce my restaurant budget by $300 this month.”
- Realistic – Go easy on yourself especially when you’re first learning how to make a budget. Don’t swear to eliminate all of your entertainment and dining out expenses immediately, because you’ll end up feeling deprived. Slowly and gradually cut back until you get to a comfortable level.
- Time-bound – Set deadlines for your goals so you know when you need to achieve them by.
Consider ways to get creative with reducing your expenses. A study by the Pew Research Center found that 61% of Millennials mainly watch streaming TV. If you’re one of them, could you cut your cable TV subscription to reduce your entertainment budget by half?
Common ways to reduce spending is to bring lunches to work, refinance your student loans, and stop using credit. For example, if you’re spending $500 a month on dining out, consider hosting friends at your house for cocktails and hors-d’oeuvres instead.
Reallocate those small adjustments toward savings and you’ll see how quickly you can accumulate an emergency savings fund and then start saving toward your bigger financial goals.
Important: Do not eliminate all fun from your life when you create your budget. You work hard for a reason and should continue going out with friends, traveling, and enjoying your life. Don’t create a budget that restricts your spending to the point of unhappiness, but keep track of your money so you can live comfortably and still enjoy the things you love.
Tools to Learn How to Make a Budget
There are efficient and free tools available to anyone learning how to make a budget. A few favorites include:
- Mint is a free and automated way to track your budget by linking your bank account up with the system in order to track your spending.
- Personal Capital is also free and it links to your bank account so it can track your spending.
- YNAB is also called “You Need a Budget:”
- Offered at a subscription service for $7/month (or $83.99/year).
- There’s a 34 day free trial.
- Students with a .edu email address get one annual subscription to YNAB for free.
Books That Can Help You Learn How to Make a Budget
After you realize the importance of learning how to make a budget and sticking to it, it’s a good idea to continue increasing your financial knowledge. There are innumerable books available on the subject of personal finance and budgeting. Here are a few of the top ones:
- Your Money or Your Life by Vicki Robin, which focuses on your relationship with money and how you can make it work for you.
- The Millionaire Next Door by Thomas Stanley, which is ideal for people who have high expenses.
- I Will Teach You to be Rich by Ramit Sethi teaches you how to manage your finances to become rich.
- Total Money Makeover by Dave Ramsey, which is great for people who are in a lot of debt.
Budgeting can be intimidating at first, but taking the necessary steps to assess your current finances and creating a plan for your money will give you a sense of control over your life. You won’t feel that pang of guilt when you purchase something for enjoyment. It’s a relief to know how much money is coming into your life and how much is going out so you can reach your goals and live a life that isn’t controlled by money, but empowered by it.
Compare the Best Student Loan Refinance Rates
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Student Debt Relief Loan Refinancing Advertiser Disclosure
College Ave: College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
College Ave Refi Education loans are not currently available to residents of Maine.
1 – The 0.25% auto-pay interest rate reduction applies as long as the borrower or cosigner, if applicable, enrolls in auto-pay and authorizes our loan servicer to automatically deduct your monthly payments from a valid bank account via Automated Clearing House (“ACH”). The rate reduction applies for as long as the monthly payment amount is successfully deducted from the designated bank account and is suspended during periods of forbearance and certain deferments. Variable rates may increase after consummation.
2 – $5,000 is the minimum requirement to refinance. The maximum loan amount is $300,000 for those with medical, dental, pharmacy or veterinary doctorate degrees, and $150,000 for all other undergraduate or graduate degrees. Information advertised valid as of 04/26/2019. Variable interest rates may increase after consummation.
3 – This informational repayment example uses typical loan terms for a refi borrower with a Full Principal & Interest Repayment and a 10-year repayment term, has a $40,000 loan and a 5.5% Annual Percentage Rate (“APR”): 120 monthly payments of $434.11 while in the repayment period, for a total amount of payments of $52,092.61. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.
ELFI: Subject to credit approval. Terms and conditions apply. To qualify for refinancing or student loans consolidation through ELFI, you must have at least $15,000 in student loan debt and must have earned a bachelor’s degree or higher from an approved post-secondary institution.
LendKey: Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
CommonBond: Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate.
Splash Financial: Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval.com
Earnest: To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest’s fixed-rate loan rates range from 3.89% APR (with autopay) to 7.89% APR (with autopay). Variable rate loan rates range from 2.50% APR (with autopay) to 7.27% APR (with autopay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms of 10 years or less. For loan terms of 10 to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 0.26% and 5.03% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of April 23, 2019 and are subject to change based on market conditions and borrower eligibility.
Auto Pay Discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 04/23/19. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice.
Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 303 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, e-mail us at firstname.lastname@example.org, or call 888-601-2801 for more information on our student loan refinance product.