In my previous posts, I have shared “What is a budget?” and “Why do you need a budget?” In this post, I will share the fundamentals of how to create a budget that works (FREE resource included, keep reading). I will break it down in simple steps, so that it will be easy for you to follow along.
Step 1: Have an income
Before you can budget, you must have some sort of income that you will use to cover your expenses and savings. Your income can be your pay from your regular job, interest/dividend payments received, rental income received, funds from your side job, etc. Once you have determined the total income that you have for the period that you are budgeting for (weekly, bi-weekly/semi-monthly, or monthly), then you can begin to allocate.
Step 2: Pay yourself first
I learned this interesting concept, that whenever you receive your paycheck, the first thing you should always do is pay yourself first. Do not worry about any bills or expenses, just do something nice for yourself as a treat for your hard work. The treat that I am proposing here, is to save something. How much, you might ask? The answer depends on what amount you feel is reasonable for how much income you have. Whether it is $5, $20, $50, or even $500 per budget period, the key here is consistency. Just remember that every dollar do add up. Too often, people save what is left after they have covered everything else, instead of making it a key priority to save first, and cover expenses later. Feel free to add multiple saving categories, and allocate something to each of them.
Step 3: Cover your mandatory expenses for survival
After you have covered your savings, the next thing you want to do is to cover essential expenses such as food, shelter (rent/mortgage), utilities (water, electricity, gas), transportation (gas, fare, insurance), etc. I consider transportation an essential expense, as you need a mode of transportation to get to your primary place of work, if you work outside of your home. If you are not able to travel, then it may be difficult for you to earn an income. Clothing is important and may fall in this category, however, please note that the frequency for purchasing clothing should be as needed, and not each budget period.
Step 4: Pay your debts and obligations
After you have saved, and ensure that you have budgeted for your essentials, the next thing you want to do is to budget for your debts and obligations. If you have student loans, credit card balances, car note, or personal loans outstanding, then you want to at least pay the minimum balance, so that you stay current. Please note that the ultimate goal is to pay off your debts as soon as possible. Interest payments do rack up over time, so the sooner you are able to clear your debts, the better it will be for you in the long run.
Step 5: Cover your discretionary expenses
By now, if you have excess remaining, you can cover your discretionary expenses such as fun and entertainment, gifts, pocket money, dining out, massages, etc. These are items that are not necessary, but are nice to have and enjoy.
Once you have completed all budget categories, you should check to ensure that all of your total income was allocated. If you have unallocated money remaining, that means that you have not fully maximized your budget. Keep working your budget until every dollar of your income is assigned to a category. If you still find yourself with extra money, just allocate it to your savings.
That covers it for this post! I have included below a FREE budget template that you can use as a guide to improve your current budget process. Remember, your budget will be unique to you, so feel free to change the categories to match your specific needs. If you have any questions, please leave a comment below. I am happy to help!