This post was most recently updated on April 19th, 2022
[A collaborative post – all thoughts are my own.]
Earlier this year I bought an A5 binder and printed my financial planner to start tracking my income and expenses. I did a lot of research on how to create a budget that works and allows me to live a comfortable and happy life in 2022. I need to track what I’m currently spending, what I can afford to spend, and what are my priorities are.
Love it or hate it, if you want to be financially successful and debt-free, you need to create a budget. The process of budgeting doesn’t have to be difficult. Some people use pen and paper, monthly budget planners, budgeting apps, and some people use a cash envelope system.
You just need to create a system that works for you. And this means the right budget methods and budget categories. So, in today’s post, I’ll share with you how I create a budget that works for me and hope you can learn from it.
Collect your financial paperwork
Before you begin to create a budget, you need to gather up all your financial statements, such as:
- Recent utility bills
- Credit card bills
- Receipts from the last three months
- Bank statements
- Loan statements
The more information you can dig up, the better. You need access to any information about your income and expenses, then create a monthly average based on all of them.
Calculate your income
How much income can you expect each month?
If you get a regular paycheck where taxes are automatically deducted, then using the net income to create a budget is fine. If you are self-employed, a freelance writer, or a blogger like me, consider using the income from your lowest-earning month in the past year as your baseline income when you set up your budget.
Start with how much income you make after deducting the tax each month. Don’t forget other income sources like child support, freelance jobs, or rental income. Record this total income as a monthly amount. Now that you know your income, you can check and review where it is going.
Create your list of monthly expenses
The next step is to write down the expenses that you expect to have during a month. Your list could include:
- Eating out
- Pet care
- Child care
- Maintenance (car)
You can track them by using your bank statements, receipts, or credit card statements from the last three months. Identify all of your monthly spendings to create an ideal budget that works for you.
Create fixed and variable expenses
Fixed expenses are mandatory expenses that you pay the same amount for each time. For example, car payments, internet service, credit card payment, mortgage, Netflix, or trash pickup.
If you plan to pay off a certain amount of debt and save a fixed amount each month, include them as your fixed expenses for savings and debt repayment. To start managing your debt and get more information on how to consolidate your debt and repair your credit, check here.
Variable expenses are the type of expenses that will change each month, they can be:
- Eating out
Start assigning spending money to each category, get started with your fixed expenses. If you’re still not sure how much you spend in each category, review your three months of bank transaction, receipts, or credit card to make a rough estimate.
If you don’t have an emergency fund for something that might pop up over the month, I create a ‘Misc’ envelope category. For example, your relative comes by and invites you to watch a movie together, you can use the ‘Misc’ category for this unexpected expense.
Total your monthly income and expenses
If you’re in a situation where your expenses are higher than income, find the variable expenses that you can cut. Create a ‘no spending, no eating out, or eating out less’ month to reduce your spending. Aim to have your income and expense to be equal. You either need to cut your fixed expenses or increase your income to balance your budget. This balance means all of your income is budgeted toward specific expenses or saving goals.
If your income is higher than your expenses, this extra money can be put towards areas of your budget, such as paying off debts, retirement savings, or travel goals.
Make it a habit
Stick to your budget and review it every week or by the end of every month. This will help you understand how your spending is tracking, what needs to be adjusted, and if you’re sticking to your financial goals. You need to monitor and continue tracking your expenses in each category. You can use the budget app to record your expenses and income totals.
Tracking where your money is going will keep you from overspending and help you identify unnecessary expenses. Take a few minutes each day to review your expenses.
More budgeting tips:
- I get a weekly paycheck and use the envelope system where I divide cash for spending into separate envelopes for different categories. When my envelope becomes empty, I have to stop spending that particular category or move money from another category to cover additional expenses.
- Personally, I don’t have a credit card and avoid having one. If you have one, pay with a credit card only if you will have the money to pay it off at the end of the month.
- Once your income is higher than your expenses, budget towards saving goals before you increase your spending. At the end of every week, I check all my cash envelope and if there’s any money left, I put them on my saving goals.
Make time with yourself every week to sit down with your budget and make sure it’s working for your current goals. Your goal to create a budget is to keep your expenses equal to or lower than your income for the month. So keep an eye on how much you have spent as you use your budget.