According to Dave Ramsey (author of the Total Money Makeover), most families experience one major financial event every decade. Learning how to make a budget is an essential step in managing your finances so you are prepared for a potential emergency. I promise you, starting a budget is one of the easiest things you’ve never done. 😉 There is no reason to feel overwhelmed by creating a budget. After all, all you’re doing is documenting how much money you have coming in, and how much money has gone out. Even if you have a healthy cushion in the bank, and are a two income household, starting a budget is important. By following the steps I’ve outlined below, you can learn how to make a budget that you can stick to.
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Your armor against financial disaster is knowing how to make a budget.
You can start a budget using just a pen and a pad of paper. OR, you can grab my pretty printable if you want something cuter. I always feel more inspired when I’m using a colorful printable! 🙂
Step 1: Determine your Monthly Income
The very first step in learning how to make a budget is super simple! In this step, all you need to do is add up your monthly income and write it down.
If you have irregular income, base your budget on the smallest possible amount. This should be an amount that you are absolutely sure you will make each month.
For example, if you make $2500 a month but you sometimes work overtime or get bonuses that bring your income up to $3500, write down $2500.
Step 2: Write Down Your Monthly Bills
Now I want you to write down all the bills that you have to pay each month, no matter how small. What is a bill? It’s an expense like your mortgage, your cable, or your water bill. We will get into your grocery expenses in the next step. This is only for obligations you MUST pay every month.
Some bills are paid quarterly (or even annually), and that’s ok! Simply divide those bills by the number of months in the period, so you know how much money your family needs to set aside to cover those when they come due.
At this point, decide which two days of the month you’ll pay your bills on. Typically this will be on your paydays. It’s much easier to track your budget when we get into later steps if you pay and allocate your resources on one or two specific days of each month.
Step 3: Write Down Your Grocery Budget
Next, you’ll need to decide on a reasonable amount to write down for your grocery bill. Don’t set yourself up for failure here. Be realistic about what you spend on groceries. You can always work on finding ways to reduce this bill later. If you are looking for suggestions on how to reduce your grocery bill, you can find my suggestions on how to save money at the grocery store here. I’m happy to say that I reduced our grocery bill by HALF and continue to save on groceries every week using apps like Ibotta and digital coupons.
If you’re totally lost, go to your online banking history and look back at your spending over the last month to get an idea of how much you’ve been spending at the grocery store. You might be shocked by how high the number is, especially if your family has been leaning on convenience meals and you haven’t started poking around the Internet for cheap recipes. However, as mentioned before, don’t go crazy trying to cut your grocery budget yet. Give yourself some wiggle room so you’re set up for success. Rome wasn’t built in a day, and you perfect how to make a budget in one, either.
Step 4: Look for Substitutions
Now that you’ve written down all your bills and necessities, is there any place that you can cut back? For us, I was shocked to find that we had cable, Internet, HBO, Showtime, Amazon Prime, Hulu, AND Netflix. This was costing us close to $200/month! We immediately whittled it down to Internet and Amazon Prime. When you sit down and learn how to make a budget it might surprise you how much money you’re spending in some categories.
You can usually negotiate a great deal with your cable provider if you just call and ask. My husband always calls our provider when our promotional rate expires and they are always quick to give us the promotional rate back rather than lose our business.
Cell phones are another area where you might be able to find some savings. Shop around for better family plans, or consider switching to a prepaid phone.
Step 5: Add Remaining Necessities
Is there anything else you purchase each month that should be included? This refers to things like household goods, gas, toiletries, etc. You’ll need a section in your budget for these expenses. Personally, I put these expenses in our grocery fund, but that’s only because my husband and I don’t go through the extras very quickly.
Step 6: Create Your “Fun”ds!
See what I did there? Haha! But seriously, your family is going to want to do things at some point. Vacations, haircuts, car maintenance, vet bills… these are all things that happen periodically that need to be incorporated into your budget. Make a list of these incidentals and how often they realistically happen, then decide how much money you need to set aside each month for them.
My husband and I use the envelope method for these expenses, with the exception of vacation. We have a second savings account for our vacation fund since it is typically larger than our “haircuts” or “date night” funds. If you are unfamiliar with the envelope method, it just means that we take out cash for these expenses and stuff it into an envelope with the appropriate label each month.
Step 7: Saving for Retirement OR Paying off Debt
This step will vary depending on what your goal is. If you are aggressively paying off debt, keep your focus on that goal if you can be debt-free (with the exception of the mortgage) within a year. Otherwise, decide how much money you’re going to put away for retirement.
Did you know half of American families don’t even have a retirement account? Don’t be that family! I personally recommend contributing to a Roth IRA, even if it’s just a modest amount each month. Even if you have a retirement plan at work you want to have some diversification. With a Roth IRA you can withdraw funds in an emergency (just not gains), so if your family finds itself in a pickle that money will be available to you.
Step 8: Tracking Your Progress
With your budget in hand, you are READY to start tracking your spending and march confidently down the road to financial security. So, what is the BEST way to track your budget? I recommend getting a monthly planner with enough space to write since you will track your budget on paydays (1st and 15th, or pick two days that work for you).
Next, write in your paydays on your calendar and go through the amounts in your budget and list those on the day you’ll pay that particular bill or allocate your funds.
Each payday just subtract your bills and your allocations for other categories to see how much income you have left over.
But what if I don’t have any income left over?
If you don’t have enough money to pay your bills, you’re going to have to find places to cut. Look at your cable and the cell phone bills first, you may be able to find a way to reduce them. This may seem frustrating at first, but this is one of the reasons you are learning how to make a budget to begin with. By learning how to make a budget now, you will be able to work toward having enough extra income to put toward your goals and wants, rather than only your needs.
Step 9: Allocating Excess Cash For Your GOALS
If you’ve made it this far, you’re at the FUN part! This is where you look at your budget and decide what goals you and your family have that you’d like to use that extra money for.
List your goals in order of importance and decide which one to go for first. At the end of each pay period write down how much leftover money you had and allocate that to your goal. If it’s easier for you to keep track of, you could always use another savings account to serve as your “goal” account!
Step 10: How to Make a Budget Work Long-term
Whew! So, we’re done, right? NOPE. It is VERY EASY to get off track, especially if you are new to budgeting. An important final step after you learn how to make a budget is to learn how to stick to it. All it takes is your spouse going out and spending money and your budget completely changes. You’ll need to keep a close eye on your bank account to make sure you know how much money is really being spent.
If your family struggles with this, you could use a cash budget, where you stop using your debit cards and take out the cash allocated to each category instead. However, my best advice is to make sure you and your partner are working as a TEAM and understand that what you spend needs to be documented.
Happy budgeting! I bet you weren’t prepared for how easy it is to learn how to make a budget. I recommend sticking to the paper method for a few months, and then graduating to an app if you want. Alternatively, you might really enjoy the pen and paper method of budgeting. Either way, congratulations on taking a HUGE step toward financial freedom!