Create A Budget In 5 Steps

How To Create A Budget

Calculate your net income

The first step is to find out how much money you make each month. You’ll want to calculate your net income, which is the amount of money you earn less taxes.

If you receive a regular paycheck through your employer, regardless if you’re part-time or full-time, the amount listed is likely your net income.

If you freelance, are self-employed or simply don’t receive a regular paycheck, you’ll need to subtract taxes from your income amount. The self-employment tax rate is 15.3%, according to the IRS

-List monthly expenses

Here are some common expenses:

Rent or mortgage payments

Loan payments (such as student, auto, and personal)

Insurance (such as health, home, and auto)

Utilities (such as electricity, water, and gas)

Phone, internet, cable, and monthly streaming subscriptions

Child care

Groceries

Transportation (such as gas, train tickets and bus fares)

Household goods

Dining

Travel

Gym memberships

Miscellaneous (such as gifts, entertainment, and apparel)

-Label fixed and variable expenses

Once you’ve compiled a list of your monthly expenses, label whether they’re fixed or variable. Fixed expenses are bills you can’t avoid: rent, utilities, transportation, insurance, food and debt repayment. Variable expenses tend to be more flexible — your gym membership, for instance, or how much you spend on dining out. If money was tight, you could always drop your gym membership and curtail your dining out spending, but you are likely always going to have to pay rent or your mortgage.

-Determine average monthly costs for each expense

After you separate fixed and variable expenses, list how much you spend on each expense per month. You can look up your spending on bank and credit card statements. Fixed expenses are easier to list on your budget than variable expenses since the cost is generally the same month-to-month. For example, debt repayment on a mortgage or auto loan will cost the same each month. But fixed utilities, such as electric and gas, and variable costs, such as dining and household goods, often fluctuate month-to-month, so you’ll need to do some math to find the average.

-Make adjustments

The last step in creating a budget is to compare your net income to your monthly expenses. If you notice that your expenses are higher than your income, you’ll need to make some adjustments. For instance, let’s say your expenses cost $300 more than your monthly net pay. You should review your variable expenses to find ways to cut costs in the amount of $300. This may include reevaluating how much you spend on groceries, household goods, streaming subscriptions, and other flexible costs. It’s a good idea to reduce these costs and regularly make adjustments to the amount of money you spend so you can avoid debt.

After you finish creating a budget, the next step is to stick to it. You can hold yourself accountable in a variety of ways. For starters, you can set reminders with your credit card and bank accounts when you reach a preset spending amount. You should also try tracking all of your expenses into your spreadsheet or budgeting app right after you make a purchase. And if you share expenses with someone else, make sure you’re both on the same page with the budget and keep each other on track.

From Swift and Associates - Our Tax Preparation Partner