Budgeting

How to Budget Your Money in 5 Easy Steps

December 14, 2015

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No matter how messy or confusing you think your finances are, creating a monthly budget doesn’t have to be. Having control over your money is important, it can help relieve financial stress and give you peace of mind.

To get started, just grab a pencil, paper, and calculator or open a spreadsheet on your computer and follow these simple steps.

1. Figure out your monthly income

Woman creating a budgetIf your income is in the form of a regular paycheck or paychecks, then use the net income (the amount left after taxes) you receive in a month as the starting point for your budget. If your paycheck amount differs from pay period to pay period, then you will want to calculate your average monthly income by using paystubs from multiple months. To do that, just add the total for each month and divide by the total number of months

Example: If you got paid $850 in March, $1200 in April, and $900 in May, then your math to determine your average monthly income will look like this:

$850+$1200+$900= $2950/3= $983.34

You should also include any other sources of income, such as money from side jobs, child support, cash tips, etc. in your total.

Add all of your income together and write this number at the top of your page or enter it into the spreadsheet. This is how much you have to spend in any given month.

2. Review your spending habits

Gather statements, and bills you’ve received in the last month and take note of how much you typically spend. For other transactions, like food and clothing, you may have to start saving your receipts over the next month to determine how much you pay on average.

3. Create a list of monthly expenses

Using the information you gathered on your spending habits split your spending into two categories: fixed and variable.

  • Fixed expenses are the same amount from month to month. This includes things like your rent, car payment, insurance, student loans, etc.
  • Variable expenses are ones that change from month to month. This includes things like electricity, water, fuel, groceries, restaurants, entertainment, shopping, etc.

Create a line item for each expense on your sheet of paper or in your spreadsheet. For variable expenses, write the average amount that you spend each month in each category.

4. Total your expenses

Add up all of your expenses and subtract the amount you spend from the total income you wrote at the top of the page.

  • If the number is positive, then you have extra income that you can save each month.
  • If the number is 0, then you’re spending just as much as you’re making each month. This isn’t necessarily a bad thing, but it means you have no extra money to save if it wasn’t already included in your expenses.
  • If the number is negative, then it’s time to make some changes.

5. Adjust your expenses

If you’re spending more than you’re making or you want to start saving money each month, then it might be time to make some changes. You can’t easily change how much you spend on your fixed expenses, but a small change with your variable expenses here or there can be the first step to starting to save money.