How to Budget


If you are struggling financially you may have begun to look at your budget as a tool to help you on your way. Budgeting is a simple concept that helps you determine the amount of money you have, how it can be stretched to meet your expenses, and where you can spend your hard earned money.

This is why it is so popular and is often the first thing suggested by experts to those seeking debt relief. There is no shortage of self help resources, teachers, and advisors pushing the importance of a good budget.

You do not need to be afraid of budgeting, either.

Many experience stress when hearing about budgeting or think it only applies to people who are in trouble with money, but budgeting helps even financially successful individuals to know their situation and spend accordingly. Budgeting is about managing your money well and helps you see a clear picture of your finances.


How to Budget Correctly

Budgeting is a crucial first step in tackling your debts. And it’s really not hard once you examine your personal goals, your income, and expenses. It is the most effective way to reach stability in your finances.

Step One: Set Your Financial Goals

This step is first because it will determine how you will implement your budget. Determine where you are and where you would like to be. Perhaps your goal is retire early or save a certain amount of money for a vacation. You may wish to enjoy the present and save only a little money on the side.

Having children, travel, paying off your debts, and consolidating your incomes into one are just some of the goals you may have. It is imperative to consider these goals to know what you will want to do with your budget. You should sit down with your partner in determining your goals if you have one as you will have to be on the same page. Exercise clear communication to discuss money and goals for the future with your partner so that any disagreements can be resolved early on.

Step Two: Determine Your Expenses

You are going to want to make a definitive list of everything you plan on spending on. This list should include absolutely everything you will be paying for each month. And you can start by reviewing your prior bank and credit card statements. This will help you see just exactly where you spend your money instead of operating under false estimates.

You could be paying much more than you think on daily expenses such as food or entertainment. Perhaps you are spending much more on coffee from your favorite coffee shop than you realize.

Larger expenses that are not monthly need to be factored in as well. Outstanding debt, medical bills or charges from the DMV need to be set and calculated with your monthly expenses in your budget. Missing an expense can really impact your budget to it is important to be as detailed as possible in determining expenses in your budget.

Housing, utilities, insurance, groceries, loan payments, and transportation will be among those essential expenses you will include in your budget. You should also account for non-essential items. These could include allowances for entertainment, gifts, a gym membership, and travel expenses.

You should also account for possible expenses that may add up. Unintended expenses should account for 10 -15% of a good budget so that they do not derail it or mess up your planning.

Step Three: Determine Your Income

You will need to determine your exact income in the next step toward a good budget. Add up all sources of income after taxes. This means if you have more than one job or work several gigs you add each to your budget. Only include guaranteed income that comes every month. Be realistic.

A good way to start doing this is to review your pay stubs so that you account for any deductions to your pay that happen automatically. These could include a savings and investment plan or health insurance deductions. Accounting for these automatic deductions helps you track every dollar of where your money is going.  You can start comparing your income to expenses once a clear, accurate picture has been made.

Step Four: Plan Out Your Budget

This is where you can now examine your numbers vs. the goals you have made for yourself. Compare your income against your expenses on paper. You should consistently aim to spend less than you earn. If you are in the red, it is time to review your expenses to see where money can be saved.

If your budget is balanced, it is time to start taking out money to put toward your financial goals. Left over money should be allocated to each category such as your retirement savings or money toward repaying a personal loan. Budgeting for a car or for travel is also done in this step by setting this money aside. You should also set aside money for an emergency in your budget at this step. You could put yourself in a better position should you lose your income or experience a substantial loss.

In this stage it is important to be honest with yourself. You have to live day to day with your budget so be up front about your expenses. It is okay to enjoy yourself and have discretionary expenses. Make sure these are accounted for as you plan for the future. Eating out a couple of times per week can be part of a responsible budget.

Step Five: Adjust Your Budget as Your Situation Changes

Your budget should be adjusted as your situation changes. In this way your budget should be treated like a living document. You may obtain a better paying job or reduce your expenses by paying off a student loan.  You can apply money that went toward an expense toward your financial goal categories or you can put it toward paying down a different debt. You may be able to increase your savings as well as your situation changes over time.

Get Started

Now that you have an overview of how to make your own budget, you should be in a better position to move toward your financial future. Get started by utilizing the tools you have at your disposal. You may wish to draft your budget using spreadsheets. Many make good use of budgeting apps you can find on your phone’s application store if you go that route.

If you are still struggling with your budget and are facing large debts, you may wish to speak with one of our advisors here at NextStep Financial. Contact us today and we will get back to you so we can help shine light on your financial future.