Building a Budget from Scratch
What We'll Cover
- How to figure out your monthly income and expenses
- How to put money away in savings while budgeting
- How to automate savings and bill payments
- Using your budget to tackle debt
- Where fun money fits in
Let’s face it—creating a budget is nobody’s idea of fun. But if you want to be financially secure, step one is making sure you don’t spend more than you make. It sounds simple, but according to a 2017 study by the PEW Charitable Trusts only 46% of Americans surveyed make more than they spend. That number can grow simply by building your budget and making conscious choices about where your money goes.
5 Steps to Build a Budget From Scratch
Complete the following steps – in order – to create a budget and conquer your finances.
1. Figure out your monthly income.
Add up your after-tax monthly income from your job and any freelance, contract or side work you do. If you are married or building this budget with a partner you share income with, add both together. This is your starting point.
2. List every monthly expense.
Start with your recurring bills, like rent or mortgage, car payments, credit card bills, groceries and utilities. Don’t forget annual or quarterly payments like registration for your car, insurance, or property taxes—include these in your monthly expenses by dividing the total annual payment by 12. Subtract your monthly bills from the monthly income you determined in step 1.
3. Pay yourself for the future.
After you’ve paid your vital bills, the first thing you should do is set some money aside into your savings account. You can automate this by scheduling transfers from your checking to your savings on the same day your paycheck is deposited. Some employers also allow you to split your direct deposit between your checking and savings accounts. If you have little or no savings, start by building up an emergency fund of around $1,000 to cover you in case of unforeseen expenses.
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4. Ditch your debt.
Now that you’ve evaluated the necessities—bills that will keep a roof over your head and the power on, and savings for the future—it’s time to crack down on debt. Just think about it—the sooner you pay down your debt, like student loans or credit cards, the sooner that money is freed up for other uses. Plan to pay more than the minimum monthly payment on these bills.
5. Make room for the fun stuff.
Budgeting doesn’t need to mean cutting the fun out of your spending—it’s all about being aware of where your money goes so you can make educated choices. Be sure to factor some entertainment money into your budget for eating out, going to concerts or shopping.
- Determine your monthly income and expenses.
- Automate a portion of your paycheck to deposit into savings.
- Pay more than the minimum on any loans or credit card bills to eliminate debt faster.
- Factor entertainment money into your budget.
Use these steps to help you create a budget and manage your spending. Remember to allow room to pay yourself, pay down debt, and pay for fun things. With a well-managed budget, you can make smart financial decisions without sacrificing the things you love to do.
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APR = Annual Percentage Rate