The Basics of Budgeting

Step 1: Begin planning your monthly budget by figuring out how much you have coming in versus how much is going out every month. Specifically break down your income and expenses, so you know how much you can spend and how much you can save each month.

Step 2: List monthly income. If your only source of income is a single job and you receive a regular paycheck with taxes automatically deducted, your monthly income is the amount left over. This is called your net income or take-home pay. If you have more than one job, list the net pay for each job to figure out your total monthly income. If you’re self-employed or have outside sources of income, such as a trust fund or parental assistance, record the exact amounts you receive every month.

Step 3: List fixed expenses. Certain expenses are fixed, which means you pay the same amount each month. Household bills that fall into this category include your rent or mortgage payment, student loans, automobile loans and personal loans. These monthly amounts should only change if you rack up charges for paying late. Try to manage your money so you always pay your bills on time and avoid late fees that bust your budget. Varying expenses each month include gas, groceries, personal grooming products and household items that need replenished. Review three months’ worth of bank and credit card statements to create a list of what you typically spend on these expenses. You can also keep all your gas and store receipts for a couple of months to get a precise amount for each expense. Whichever method you choose, calculate an average and plug the amount into your budget.

Step 4: Creating your budget. Once you know how much you expect to earn and spend monthly, create your monthly budget. Start big, and then get more specific in areas that vary and could hurt your overall budgeting plan. To help create a comprehensive budget, you may want to seek the advice of a financial planner.

Most financial advisers recommend following the 50/30/20 model for budgeting. This model suggests you use 50% of your take-home pay for needs, 30% for wants and 20% for savings. No matter which budget system you use, choose a tracking method that doesn’t require more time and maintenance than you’re willing to spend on it to avoid setting yourself up for failure.

The primary part of your budget should always cover your needs. What’s left over is split between the things you want and your savings. Wants can include shopping, dining out, going to movies and other activities you enjoy. However, some things, such as food, can fall into both the needs and wants categories. Food is a necessary part of life, but it’s difficult to figure out how much to budget for groceries.