How To Build A Budget From Scratch
Personal finance goals and questions come up so often in our community, so we thought it was high time we talked about this on the blog. I am extremely passionate about financial freedom, both in my own life and helping to equip others, so I thought I’d share a little bit about how to build a budget.
If you follow a written budget, you will be able to confidently say that is the number one reason you feel at peace with your finances. You won’t have to worry about whether or not you’ll have enough money to pay your mortgage or insurance every month; you’ll know that you will. The headspace this surety frees up will allow you to focus on your dreams and keep you on track to reach your lifetime financial goals. What could be better than that?
If the word budget sounds scary, shake off that fear and listen to this: a budget is not about denying yourself and cutting out everything fun. It’s about making a plan.
A budget will help you be purposeful about how you spend and save instead of just closing your eyes and hoping. While there are many ways to track a budget (which we’ll chat about later), building a budget is pretty simple.
It’s all about two things: income and expenses. These make up your cash flow. Here are the steps to building a budget that makes sense for your needs, spending, and goals.
How To Build A Budget
1. Calculate your monthly net income
This is your gross income minus taxes. For most of us, this is simply our paycheck but make sure you check the breakdown thoroughly.
2. Add up all of your fixed expenses
Fixed expenses are difficult or impossible to change and are the same (or roughly the same) every month. These could include:
- Your electric bill
- Student loans
- Car loan(s)
- Auto insurance
- Health insurance, etc.
3. Calculate your monthly contribution to your financial goals
As the experts say, pay yourself first.
If it’s a priority for you, include charitable giving here as well. Now, whatever you do, do not skip this step! Treat your savings like any other budget line item, not as something optional if there’s money leftover.
4. Add up all of your variable expenses
As the name implies, these are things that are not externally set.
So you could, for example, cut back here if you wanted to move faster towards your goals.
Examples for this part of your budget could include:
- Dining out
- Personal care, etc.
5. Put it all together
When you subtract your fixed expenses, your contributions to your financial goals, and your variable expenses from your net incomes, there are three possible outcomes. You’ll either:
- Have a surplus
- Break even
- Have a deficit
If you come out with a surplus, you can either save more or spend more (assuming you’re already saving the recommended amounts). If you break even, perfect! But if you have a deficit, it’s time to take another look at your figures (most likely your variable expenses) and adjust numbers until you’re in the clear. By the time your budget is finished, you’ll have a plan in your head, ready to be followed on your way to financial freedom.
While this might be easy to understand, it’s a bit harder to follow in practice.
Walk through these steps and start calculating. If you’ve never made a budget before and are unsure how much to allocate for certain categories, have a look back through last month’s expenses (maybe on a credit or debit card statement) and estimate from there. It might take a few months to get the balance across categories just right.
You’ll also want to make plans to check in periodically to see how you’re pacing – it’s a good idea to do that every two months. After all, a budget is a plan, but plans can change. Be sure to adjust your budget during the year if your circumstances change or if you decide you want to prioritize one category over another. That’s totally fine, as long as the income and expenses balance out in the end.