What’s the Best Way to Budget?

Everyone needs a budget. No matter how much you earn, it’s important to have a budget to avoid overspending and to keep track of where your money is going. If you’ve never had a budget (or if you’ve never had a successful budget that you’ve been able to stick to) it might seem a little overwhelming to prepare one. One of the toughest parts is figuring out where to start. How do you create a budget? The process is a little different for everyone, but here are some tips that could help.

Before you can create a budget, you need to understand your current spending habits. You won’t be able to prepare a realistic plan without knowing what you need to spend money on. If you track your spending, it’s easy to look back and see where your money has gone. If you don’t already track spending, there are a couple options. One is to start tracking for at least 30 days and then use the data you gather to create a budget. The other is to look at your debit and credit card statements for guidance. While looking at past statements won’t give you 100% accurate information, it will likely provide you with enough details to get started on your budget.

Once you know what you spend money on, break it into categories. Each person will have different ways to categorize spending, but common ones include “housing,” “transportation,” “food,” “entertainment,” etc.

Don’t forget to include a category for “emergency savings.” Having an emergency fund is crucial and it can prevent you from needing to borrow money for unexpected costs. Life is unpredictable, so make sure you have some money put aside for emergencies. Most experts recommend having at least three-months of expenses saved in your emergency fund, so if you’re not at that point, you’ll need to put some money aside each month for emergencies.

There are some expenses that don’t come up every month, so they’re a bit more difficult to fit into a budget. Birthdays, holidays, tax bills, insurance premiums, medical costs, and various other expenses may not be monthly costs, but they still need to be budgeted for. Calculate how much you expect to spend on these costs, then divide this amount by 12 to give you a monthly cost. Add this cost to your budget and put aside money for irregular expenses every month. This will keep you from scrambling to find money for holiday shopping, for instance.

When you’re creating a budget, you also need to know how much money you have coming in. When you’re figuring out your income, only include money that you can count on. Bonuses and other funds you may or may not receive shouldn’t be included.

If you earn an irregular income (such as if you work contract or freelance work), it can be tougher to prepare a budget. One way to do so is to figure out your average monthly income and use that number in your budget. In the months you earn more than the average, you’ll need to put that money aside to help things balance in the months you earn less than the average

Everyone needs to set priorities when they’re budgeting. No matter what you earn, there simply won’t be money available for everything. While you will have certain expenses that you’ll need to pay every month no matter what (food, transportation, housing, etc.) there are others that are more flexible. For instance, the amount you spend on entertainment, travel, or retirement savings will be entirely up to you. Since there probably won’t be enough money to go around to spend as much as possible on each of these costs, you’ll need to prioritize your spending. Figure out what categories are most important to you and focus your efforts on these expenses. This will likely mean you’ll need to spend less in other areas to achieve your financial goals.

Your budget will have to balance. That means you’ll need to spend no more than you make. If you can’t afford all of your monthly expenses on your current income, you’ll need to make some cuts so it balances.

If you don’t already track your spending, it’s important that you do. Keeping track of what you spend can help you stay on budget and avoid spending money on expenses that aren’t in your plan. Whether you use an app on your phone, a spreadsheet on your computer, a piece of paper, or any other method, try to record each purchase you make shortly after you make it. This will help prevent forgetting any expenses.

If you find that you’re spending more in one category than you’ve budgeted for, you’ll need to adjust your budget for that month to make sure you can still afford all of your expenses.