Updated July 28th, 2022
As you begin to put together your personal budget and begin the journey toward better financial stability, there will be plenty of advice on where to begin and how to proceed. Sometimes too much information can be a bad thing, especially when you're already feeling overwhelmed by the prospect of finally confronting your spending and savings habits. With all the "rules" out there on the best ways to create a personal budget, there is really only one you need to follow: keep it simple.
Why "Keeping It Simple" is a great rule in Managing your Budget
When people decide to make a positive change in their lives, they tend to overdo it. Instead of changing just one thing until it becomes a habit, they try to completely overhaul every aspect of their lives. While ambition is a noble thing, taking on too much can lead to burnout. Keeping it simple will help you meet realistic goals and build confidence as you move toward tackling larger challenges. If your budget is complicated from the start, you're more likely to resort to old spending habits and get in the way of your own progress.
4 Simple Steps in Managing Your Budget
Budget Step #1: Calculate your net income
Understanding how much you make is the very first step in creating a budget. Your net income is how much you make after such as taxes, health coverage, or other deductions are removed. Before you even start thinking of ways you may be able to save money, you first have to understand how much money is coming in each month. This is especially important if you are self-employed or your monthly income varies for other reasons.
Budget Step #2: Track your spending
The second step in managing your budget is by making note of how much you spend each month. Take the time to actually sit down and add up how much money goes toward regular monthly bills, such as rent or mortgage payments, car notes, utilities, insurance, etc. Pro Tip: There are several free budget templates available that can serve as a starting point for tracking your monthly expenses. Adding categories to your template tracker is generally a good idea too, as it can give you an understanding on what types of things you spend the most on each month, and if there is any room to reduce spending in subsequent months. Tracking your spending can help you get a more accurate view of your habits.
Budget Step #3: Set goals using the 50/30/20 Budget Rule
Before you start diving into comparing how much you make compared to how much you spend, set some short-term and long-term budget goals. This will help you start with a sense of purpose and a clear vision of why you are creating a personal budget in the first place. The 50/30/20 Budget rule is one budget guide that suggests you spend 50% of your net income on “needs, 30% on “wants”, and put the remaining 20% of your income into “savings”. The goal of the 50/30/20 rule is really aimed at giving people the ability to manage their money while putting funds aside for both emergencies and retirement. It is geared towards individuals who don’t like getting caught up in detailed budgets, and allows for flexibility in the percentages if the 50/30/20 percent allocation doesn’t make sense.
Budget Step #4: Create your personal budget
Put everything together by creating your actual budget. Look at how much you earn and how much you spend and develop a plan for moving forward. Review the categories that you spend the most in and see if there are any opportunities to reduce spending. Review the 50/30/20 rule and decide whether some of the expenses you have listed are needs or wants. If you don't have a lot of money left over each month, you will have to take a closer look at what can be eliminated so you have more money to spend on needs and put toward savings.
Creating a personal budget doesn't have to be overwhelming. Tackle it by taking steps in the right direction and remember that keeping it simple is always the best route. You are just getting started, so take it slow and always keep your goals in mind.