Do you currently use a budget? If you don’t, I’m going to teach you how to take control of your finances and create your first budget in four easy steps!
According to US Bank, 59% of Americans choose not to use a budget. This statistic isn’t surprising to me since 78% of Americans are living paycheck to paycheck.
The uncertainty of living without a plan for my money scares me. With a budget, I know exactly how much money I have and what I need that money to do according to my goals.
My husband and I had a situation recently where his truck wouldn’t start. We had to have it towed to a shop and repaired. A few years ago, this situation would take weeks to resolve.
This time, we didn’t panic because we knew that we had budgeted money for situations like this. The thing is, unexpected things will always happen.
There is no way to get around that. What you can change is the way that you prepare for these things, and the way that you handle them.
Budgets aren’t as scary as they sound. They don’t restrict your spending. They permit you to spend your money the way you planned.
Using a budget doesn’t add extra money to your bank account, but it allows you to see patterns with your money and make preparations for things that are inevitable.
Now that you see the importance of a budget, it’s time to learn how to create your first budget.
There are several types of budgets. While the end goal is the same for each kind of budget, it is about finding one that works for you and your situation.
The budget that we are creating today is zero-based.
Many people get scared when they hear the term “zero-based budget” because they think it means that you have a zero balance in your bank account, which is not the case.
A zero-based budget is a budget where you assign every penny to a category. I guess it is just a fancy way to say you are giving every dollar a job to do.
Zero-based budgets help you see exactly where your money is going. This type of budget helps keep you on track so that you don’t overspend or run out of money before the end of the month.
Now sometimes you may budget and find that you still run out of money before the end of the month. No funds at the end of the month indicate that your income is too low for your living situation.
How to create your first budget
Creating your first budget is going to be easier than you think. The hard part is being honest with yourself.
Don’t cheat yourself by not being truthful about your money.
Take your budget step by step, no matter how good or bad it seems. Budgeting is a journey, and you will get the hang of it in no time.
Grab a sheet of paper or your favorite budget app, and let’s get started.
Step 1: Calculate your monthly income
The first step is to calculate your monthly income. You want to include all forms of your income.
The money that you receive after taxes and deductions, also known as your take-home pay, plus payments from side hustles, is considered part of your monthly income.
The easiest way to calculate your monthly income is to look at your check stub for net income. When you have that total, add this amount to additional money that you may receive outside of your job.
Make sure you choose the method that makes you comfortable.
Step 2: Calculate your expenses
Now that you have your total income written down, it’s time to calculate your expenses. Think about everything that you pay monthly, quarterly, and annually.
Some expenses like rent and cable will be the same amount each month. Other bills vary each month, like electricity and water.
Your first monthly budget should include things like rent/mortgage, groceries, car payment, insurance, clothes, phone, cable, student loans, and anything in between.
It may be helpful to use your bank statements and credit card statements from previous months to help you remember everything that you need to pay.
This step may take a bit of time, but don’t rush. You want your first budget to be as accurate as possible, so include everything!
Step 3: Subtract expenses from income
Step three is to subtract all of your expenses from your income. To get started, add up all of your expenses from step two.
Subtract this number from the income from step one. Did you end up with a positive or negative number?
If you have a positive number, that means you make more than you spend per month. A positive number puts you ahead of the game.
You should take a look at your financial goals and add an emergency fund along with a few savings and giving categories to your budget.
If you have a negative number, it means you do not make enough money to cover your monthly bills. You have a couple of options here.
The first option is to cut expenses that are not necessary. Next, you can call a few companies to see if there are cheaper packages or if they are willing to push back your due date.
Don’t get discouraged and give up on budgeting if you can’t cover all of your expenses. Over time, you will learn where to cut costs and create a long term plan to increase your income each year.
Step 4: Track all spending
The final step for creating your first budget is to track your spending. Tracking your spending may seem tedious, but it works for several reasons.
The main reason is that it holds you accountable. If you spend money, you have to track it in your budget.
You’re less likely to make impulse purchases because you know you will have to track the expense and see the impact on your budget.
Tracking expenses also works well because you are more likely to check your budget before making purchases. You will use your budget as a roadmap, not an afterthought, when you have to track your expenses.
The easiest way to track expenses is to write them down as they happen. If you’re not able to do that, save your receipts each day and before bed track everything that you spent for the day.
When you track your expenses, you are subtracting the money that you spent from the money that you have budgeted for each category.
Let’s say you have $15 in your coffee category. You go out today and purchase a coffee for $3.25. After you track this expense, you will see that you only have $11.75 left for coffee until you get paid again.
Tracking may seem tedious at first, but it is essential when you start budgeting.
What happens if I go over budget?
I wish I could tell you this won’t happen, but you will go over your budget at some point. It happens to the best of us.
Just remember that budgets are flexible. Categories can always be changed to reflect your real life.
When I began budgeting, I would go over the budget for groceries every single month. I had to adjust my budget by moving money from another category to the grocery category to ensure that I didn’t overdraw my bank account.
After a couple of months of overspending and adjusting categories, I noticed the pattern. I wasn’t budgeting enough for my groceries each month, so
I had two choices. The options were to cut down the amount of food that I purchased each week, or I could increase my grocery budget and decrease another category.
My choice was to decrease the category for entertainment because eating healthy food was more important to me.
Budgeting is a process. You will make several decisions like this. Make adjustments month to month, and don’t beat yourself up if you go over budget.
What happens if I get off track?
Anyone that uses a budget will tell you that they have gotten off track at some point. Life happens. People get sick or have bad weeks.
There have been times where I have neglected my budget for weeks at a time. Each time that happens, I don’t beat myself up. I do what I like to call a fresh start.
A fresh start is where you start over with a clean slate. You use the four steps above to budget the money that you currently have in your checking account.
Don’t worry about going back to categorize and track all of the expenses that happened while you weren’t tracking. Just start fresh.
Figure out how much money you currently have and what your money needs to do before you get paid again.
Create a fresh budget and begin tracking from there. It’s as simple as that!
The Bottom Line
I know that budgeting may seem hard at first, but trust me, it gets better. It may take a few months to get the hang of it.
The main thing to remember is don’t give up. Just take it one step at a time. You already have your first budget, track your expenses, and adjust categories as needed.
What is your biggest struggle with budgeting? Let me know in the comments.