How to Create a Budget for 2018 in 5 Steps

January 19, 2018

It can feel overwhelming to create a budget. More often than not, people tend to get lost in all the details and give up before they’ve really even started. We’ve put together an easy five-step plan that will allow you to create a budget that truly works and allows the opportunity to be more in control of your finances, thus giving you more chances to save and invest for your future.

Step One: Know Your Income

Do you ever get confused between net and gross income? Net income is what matters when you create a budget. This is your take-home pay. After taxes and withholdings, net income is the amount of “cash” you walk away with on payday.

Write down the total for a one-month period of your take-home pay. If your budget is dependent on more than your paycheck, you’ll need the total of all paychecks involved for a one-month period.

Step Two: Log Your Fixed Expenses

These are your monthly bills like utilities, house or rent payment, car payment, cable TV, etc. Write them out in a list form below your net income and total them together.

For bills that fluctuate such as your electric or water bill, round them up. If you typically pay around $196/month for your electric bill, round it up to $200. Remember: It’s always better to overestimate than under prepare.

Pro Tip: Many utility companies offer average-pay plans. Average pay plans allow your yearly bill to be averaged so that you pay the same amount each month rather than different amounts during different seasons. This especially helps when trying to create a budget that works.

Step Three: Log Your Variable Expenses

When you create a budget, it’s of utmost importance to not forget your variable expenses. Things like gas, groceries, and entertainment can add up in a hurry and cause a landslide of budgeting woes if not properly accounted for.

When it comes to logging these, it’s best to figure as closely as you can. Putting yourself in the habit of setting strict budget lines in your variable expenses will ensure success of your budget for many years to come. Set an allotted amount for your gas each month (factor in how much you’ll need to get to and from work each week, and then add in an extra tank or two each month for buffer). Truly examine how much you spend on groceries each month, set a specific amount, and stick to it.

Utilizing the envelope system from Dave Ramsey especially helps when keeping yourself accountable to limits you set for your variable expenses.

Step Four: Examine Your Spending

Now that you’ve calculated what you have coming in and what you have going out, let’s do the math! Subtract your outgoing from your incoming. How much do you have left over? Are you seeing a negative number?

If you’re seeing that your outgoing outweighs your incoming or leaves little to nothing left over, take another look at your variable expenses and see what you can cut. Yes, that Spotify subscription is nice, but you could probably handle listening to a few advertisements here and there. How large is your limit for eating out? Loads of money can be saved simply by cooking at home. See where you can cut your gas expenses like stopping by that store on your way home from work instead of making a separate trip over the weekend. Take advantage of online coupon watchers and money saving opportunities with sites like Money Saving Mom to stretch your dollar further.

Start trimming down on your wants, and focus on your needs. Remember, you can always add these back after you’ve used some of your savings to pay things off.

Step Five: Develop a Plan

Now that you have a little more wiggle room in your monthly budget, it’s time to put a plan into action. Take the amount you have left over at the end of the month, and divide it in half. The number you have left should go straight into savings every month. Even if it’s just $50, by the end of the year, that $50 has become $600. In order to save for anything – be it for an emergency fund, your child’s college fund, or retirement – you have to start somewhere.

To create a budget that expands your spendable income over time, you should now take the other half of the leftover monthly income and apply it towards a bill with a lifespan (ie: car loan, mortgage payment, etc). Pick one of these loans at a time – start with the one that has the highest interest rate – and throw that extra money onto that loan each month. Before you know it, you’ll have one less loan to pay, opening up more income to pay off more debt. The ultimate goal is that your mortgage payment will be the only debt left, so always focus on putting extra towards that debt last.

Always Come Back to Review

Budgets change based on life changes, and that’s why you always need to keep reviewing them. Things like raises add more to your net income, but don’t allow that as an opportunity to throw it all away in your variable expenses category.

If you receive a raise, automatically allocate half of it to your savings account each month. After all, you were making it by without it before. Then, use that other half to set another goal – perhaps it’s chipping away at another loan so you can be debt-free faster. Perhaps it’s for setting up a Christmas fund account so you aren’t so stretched during the holidays each year. Whatever it is, make sure it benefits you in the long run.

If you need help to keep track of your spending, look into an account balancing system like Quicken. Make sure you’re logging every amount you spend so you always know where your money is going. After just a short time of doing so, you’ll be able to access a quick, at-a-glance view of where your funds go.

To stop the credit card debt train from leaving the station with all your net income, stop by your local South Suburban Currency Exchange and pick up a prepaid debit card so you can safely and easily manage your money.