Build A Budget in 7 Steps
This is not the place where I talk about how important having a budget is. Chances are if you’re here, you’re ready to get this train rolling… you’re ready to start a quintessential part to excellent financial health.
What I’m here for, however, is the HOW.
How do I get this stinking thing set up to be beneficial for me?
By using the 7 steps listed below, I’ve helped several friends successfully establish their monthly budgets. And look forward to doing the same for you!
Step 1| Gather the Numbers
Before we even get to the budgeting part, be sure to gather up any documents giving you the real numbers (none of this “I’d say it’s around here,” we need cold hard facts people).
Documents to look for could be the following:
- Past 3 months bank statements (online banking is what I use… less paper)
- Side hustle transfers
- Bill Records
Some of these numbers could vary drastically month-to-month, if that is the case I recommend using a three month average or the safest option.
Step 2| Calculate Monthly Income
Now grab a budget printable or plain piece of paper (a school notebook was where my first budget called home), and list ALL sources of income and the amount.
For some people this will be their monthly salary, for others each paycheck amount, still others might include rental property or side hustles. Just be sure to include everything!
Now, add ’em up!
Be sure to circle, bold (write in a metallic gold gel pen) that income total. You’ll be needing that number again in Step 6!
Step 3| Calculate Monthly Expenses
Now… we do the same with expenses taken from your past bills and bank statements you broke out in step 1 (ahhh, see how we aren’t scrambling for all this information? It’s glorious!).
I like to start with my living expenses or things that I have to pay. Things like:
- Car Payment
Then I move on to my personal expenses or things that help make life comfortable but aren’t 100% necessary. These things could be:
- Eating Out
Remember to be detailed! The more detailed you are in your descriptions the better you will know where you’re money is going. As you get more comfortable setting your budget, you will know what categories you need to budget for.
And just like our income, total these monthly expenses up and save them for later.
Step 4| Set S.M.A.R.T. Financial Goals
To start this step, think about what your ideal financial situation would be. Is it to have no debt? Go on more vacations? Are you looking to save for retirement? Whatever your goal might be, think about what steps you’re comfortable taking.
For Ethan and I, we want to abolish our debt and have thus made that a top priority.
Once you have a clear financial situation picked out, it’s time to set a S.M.A.R.T. Goal. Each letter stands for:
- S: Specific- get detailed here
- M: Measurable- how will you measure success
- A: Achievable- realistic for your situation
- R: Relevant- in line with your top priority
- T: Timely- has a time-frame
It’s okay if you have more than one goal! As you’ll learn in the next step, you may have the freedom to tackle both goals at one time.
Step 5| Combine Financial Goals with Expenses
Determine for your situation what you will (notice I didn’t say “can”) add into your budget to achieve this goal.
For example, if you are looking to get debt free how much extra could you apply towards accelerated debt payments each month? How long will it take to get there at that rate? Can you do more?
You already said this is a top priority. Let’s budget for it!
Add this additional payment under the expenses category and TAH-DAH… Your goal has just became a monthly commitment.
Take a moment to compare you’re personal expenses and your financial goal commitment. Are the expenses skewed toward a higher allowance? I challenge you to seriously think what personal expenses you can change to transfer those funds to make higher financial goal contributions.
Or hey, you might be able to add another financial goal with that saved money!
After much figuring, write down your new financial commitment under the Expenses category, and find your new Total Expenses.
Step 6| Subtract Expenses from Income
Have you found your number? Here is how to interpret the results.
Positive Number: Congratulations! You are bringing in more money than you are spending each month. You have some wiggle room to reanalyze your expenses to see where you can improve and really go after your financial goal! By no means is this a free pass to go wild, but you’re heading in the right direction to achieve your big financial dream.
Good Ole Zero: You are spending as much money as you bring in each month. While it’s good you’re covering what you have to, you have no wiggle room for any surprises. And surprises my friend do happen. Go back to your income or expenses and see what you can change to create a little more gap. There are several side hustles available to increase income or smart hacks to decrease expenses.
Negative Number: Uh-Oh… You are spending more money than you are bringing in each month. We’ve got some opportunities to discover within the budget we created. Take a good long look at your personal expenses and tighten the reigns as much as you can there. Do some research on how to simplify expenses or limit grocery spending. Limit entertainment and unnecessary shopping to a minimum. You might also find it beneficial to couple decreased expenses AND additional income until your budget is positive.
No matter how things turned out, you can take pride in knowing you just completed your first budget and have a game plan for what you need to do next to reach financial success!
All that is left is…
Step 7| Implement, Check, and Adjust
You now have created and have the knowledge to keep creating your budget! The things about budgets, though, is that they are always changing. Life happens, seasons change, priorities rearrange.
Through all this change be sure to keep checking and adjusting your budget at least each month (I even check mine once a week to make sure we’re on track).
If things aren’t where they need to be, adjust somewhere and try something else.
A good thing to remember is the commitment you made towards your financial goal. Be sure to include all family contributors on this journey with complete transparency. Only by working together can your goal be accomplished and successes be celebrated!
I hope you continue to strive towards stupendous financial health! Feel free to reach out to me with questions, as I said I love helping people start out on a strong financial journey and that includes YOU!