How to Create a Budget in 9 Easy Steps

The first step to creating a budget is to list your monthly after tax income. You can list out income that you receive from your job, side hustles, or freelance work as long as the income comes in regularly. If you have irregular income, such as income from a commission based job, you want to estimate what your income will be.

Look at what you have made the past few months from a job with irregular pay to get an accurate estimate of what your income will be. Once you have calculated your monthly after tax income, write that number down. Your budget should not exceed this number.

Secondly, you want to subtract all of your fixed expenses that are necessities from your income in Step 1. A fixed expense is anything that costs the same every single month. You want to focus on expenses that are necessities. This would include things like rent/mortgage payments, car payments, and insurance.

Add up the costs of all of these and then subtract them from your income. For example, say that you make $5,000 per month and all of your fixed necessities cost $1,500 per month. Subtract the $1,500 from the $5,000 which would leave you with  $3,500 left in your budget.

Variable expenses are expenses that can change in cost month to month. After you have subtracted fixed necessities, you then want to subtract variable expenses from your budget. This would include things like groceries, gas, and utilities.

Since these expenses are variable, you want to try your best to estimate what they will be. Look at how much these expenses have cost the past few months to gauge how much they will cost in the future. Once you do this, you can subtract them from your budget.

If you have $3,500 left after paying your fixed expenses, and your variable expenses cost $900 per month, you would subtract the $900 from the $3,500 and be left with $2,600.

Debt is any financial obligation in which the only way you can repay it is from money you have to earn. If you have racked up debt that meets this definition, it is important to account for it in your budget so you can pay it off.

This might include credit cards, personal loans, and student loans. For sake of example, let's assume that you have some debt and plan to put $500 per month towards paying it off. You would subtract this from your remaining $2,600 which would leave you with $2,100.

A well balanced budget will not only help you manage the money you have today, but will also help you build money for your future. Part of your budget needs to go towards things that will build wealth for your future.

This might include opening up a Roth IRA or brokerage account, investing in your employer's 401k plan, investing in real estate, and much more. The percentage of your budget that should be allocated towards this will vary based upon your individual circumstances, but a good starting place is to invest 15% to 20% of your income.

If we keep the assumption above that you make $5,000 per month in after tax income, you would need to invest between $750 and $1,000 per month. Let's assume that you can do $1,000. You need to subtract this from your budget which would leave you with $1,100 if we continue from the previous step.

Even if you are a master at budgeting, miscellaneous expenses are going to arise. It is important that you allocate part of your budget towards covering these expenses. If you make $5,000 per month, you can allocate a few hundred bucks towards miscellaneous expenses.

Over time, this miscellaneous expense fund can turn into an emergency fund if you continue to save this money each month. An emergency fund is a cash reserve that you can access to pay for unexpected expenses. It is important to create an emergency fund as part of a well rounded financial plan.

Up until this point, your budget should be looking pretty good. You have accounted for all of your necessary expenses that you need to take care of. The good news is that you have $900 remaining. You can use this $900 to spend on your wants guilt free as you have budgeted the money.

This money can go towards entertainment, eating out, sporting events, concerts, clothing, electronics, a vacation, and whatever else your heart desires. Keep in mind that you have to be careful when you spend on your wants.

It is easier to spend money on things you want as opposed to things you need. This is where many people blow their budget. When you spend money on the things you want, you need to track the purchases to make sure you don't blow your budget.

This is especially true if you have a more expensive want. For example, say you want a new TV that is going to cost $800. You have $900 to spend on wants per month so you could just go and buy it. However, this would only leave you with $100 for the rest of the month which would make it significantly harder to follow your budget.

Instead, you could set aside a few hundred dollars each month for four months before and then go and buy it. This would leave you with a remaining $700 for each of those four months to spend on other wants which would make it much easier to stick to your budget.

Once you have gone through the steps above, you will have an accurate estimate of what your spending will be. However, your actual spending may differ from your budget. This can be due to unexpected or variable expenses.

It is vital that you track your spending so you can be prepared to make any changes to your budget if needed. You can do this the old fashioned way by pulling out a piece of pen and paper and reviewing your credit card and bank statements to find discrepancies.

However, a better way is to jump into the 21st century and use a budgeting app. Budgeting apps allow you to connect your credit cards and bank accounts to the app. The apps will then give you a detailed breakdown of your spending so you can know if your budget needs to be adjusted.

After tracking your spending and reviewing your budget, you might need to make an adjustment. For example, say that you anticipated spending $500 per month on groceries. However, after reviewing your spending, you noticed that you have been spending $650 per month on groceries.

There is no need to freak out that you broke your budget. You simply need to adjust it. Look in your budget to see where there is room for $150. It will likely be in the wants section of your budget. Add $150 to the grocery section of your budget and take away $150 from the wants section of your budget.

You want to review your budget on a monthly budget. This may seem like a hassle, but it is important to prepare for each month. For example, maybe November and December are coming up so you need to start preparing for the increased costs of the holidays.

You will always have necessities that you need to pay for every month such as your rent or mortgage payment, groceries, insurance, etc. The point of reviewing your budget each month is to prepare for any expenses that you don't usually have to worry about during the month.

If you are married or have your finances integrated with a significant other, it is important that you do your budget with them. This will help you with a couple of things. First, it will give you an accountability partner. It is much easier to stick to your budget when someone else is there to encourage you to do so.

You also get to be the accountability partner for your spouse. Secondly, it will help create alignment with your money. It is important that you and your spouse are aligned financially. A cornerstone of financial alignment is having a budget.

It helps both of you know where your money is going, and will allow you to have discussions about what you want your money to do. Money is not the most important thing in the world, but if you and your spouse are on the same page about it, your relationship will be much better off.

No one likes to pay bills, but you can save yourself time by automating some of your bills to be taken out of your bank account automatically. A good way to do this is to automate fixed necessities. These are bills that you must pay every month that will cost the same amount of money.

Since you must pay these bills and you won't be surprised by a change in price, setting up an auto draft makes sense. This might include your rent, car payment, insurance, and others. Be careful not to automate every last bill you have as you can run into cash flow problems.

The point of budgeting is not to be perfect. The point is to create balance within your financial life so that you can manage the money you have today and set yourself up for your future. If you break your budget one month, don't beat yourself up.

Everyone who has tried budgeting before, has likely broken their budget at some point. If you do break your budget, simply get back on track the next month. Budgeting takes discipline and practice so give yourself a break as you figure it out.

The bottom line is that following a budget is one of the cornerstones of a well rounded financial plan. When you budget, you want to list your after tax monthly income, and then subtract all of your expenses that you are responsible for.

Start with your necessities, then move on to true debt, then expenses that will build wealth for your future, then miscellaneous expenses and finally your wants. Budgeting is not a one time thing. Make sure to track and review your budget, and give yourself grace as you try your best to follow it.