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How to Create a Budget

Budgeting is a powerful way to save more and spend less. Learn how it works and why it’s so beneficial in this guide.

Want to have more control over your finances? No matter how much you make, creating a budget is a great way to save more each month and know exactly where your money is going. While it may seem tough at first, you can implement this into your daily and monthly routine with a little bit of planning.

Developing a budget is also known as cash-flow planning. If you work with a financial advisor or planner, they’ll also be able to work with you on this task. As mentioned, doing so will help you know where your money goes, but it also gives you more to save, invest, and put toward big goals, like retirement or your children’s college.

To help you get started, this article will outline the basics of budgeting. This includes how to begin the process and an explanation of its benefits. You’ll also learn how a professional can help you save more and put your newfound savings to work.

What Is a Budget?

A budget is a plan that you create to determine how much money you’ll spend, either monthly, annually, or both. Usually, you’ll keep track of your income and monthly expenses to figure out how much you have left over to save and invest. You may also see some, such as financial planners, refer to this as cash-flow planning.

People manage their cash flow to keep the money they make and deter needless spending. At times, it can be hard to hold a firm grip on your finances. Because of this, dedicating funds to savings or investing may feel difficult or even out of the question. But with a plan in place, you’re able to take the reins and feel more confident about allocating your funds where you want.

Establishing a Budget

On the surface, budgeting seems as simple as money in vs. out. However, as basic as it is, it’s not always easy. It takes careful planning and discipline to be successful. Without following the right mindset and best practices, you’re more likely to encounter obstacles or even fall off completely.

1. Keep Your Goals in Mind

It’s important to keep your financial goals in mind as you create a budget. Both short- and long-term objectives can help you stay the course and feel successful. Without benchmarking progress, it can be easy to slide off track.

Whether it’s an amount of money you want saved by a certain period or if it’s cutting your spending down to smaller amounts each month, goals allow you to monitor your progress and adjust, if needed.

2. Determine Your Monthly Net Income

One of the most vital steps to budgeting is determining your monthly net income. When calculating this, be sure to include tax withholdings that affect it. For instance, if you make $5,000 per month and your employer withholds $800 for taxes, be sure to reflect that your net income is $4,200.

When you determine your monthly income, be sure to include all sources, even if it’s not your main job. Some examples of income sources include:

If you make any money at all, it should be in your budget. Even if it’s a small amount, you should be aware of it and write it down.

3. Keep Track of All Monthly Expenses

The second piece to this project is looking at how much you’re spending per month. You should be keeping track of every purchase, even if it’s as small as a pack of gum. Below are some of the most major expenses people deal with:

  • Car payments
  • Rent
  • Mortgage
  • Groceries
  • Taxes
  • Insurance premiums

These are just some of the most common expenses, but any outflow of cash fits under this category.

A smart way to keep track of smaller purchases is to keep receipts and then add them to your total expenses each month. This practice can work well because you can monitor every purchase and have physical records on hand to review at the end of the term.

4. Record Data on a Spreadsheet

You’re going to need a place to keep all of your records. Recording your budget on a spreadsheet can help you monitor your progress. Applications such as Microsoft Excel and Google Sheets are great for building your spreadsheet because of their mathematics capability and convenience.

Below is a fictional example of an individual living alone who makes $4,400 per month after taxes (you can use this table to create your budget if you’d like):

Income Source (Monthly)Amount Earned (Monthly)
Main Job$4,400
Expenses (Monthly)Amount Spent (Monthly)
Car payment$350
Phone plan$75

Difference: $2,290

In the above scenario, the person now has $2,290 to do whatever they want. In this case, it’s smart to consider investing and saving a portion of this money so that it grows over time.

5. Stay Disciplined

Budgeting can be hard, especially when you’re just beginning. This is because it takes discipline to cut out extra spending and track every small detail. Even though it can be tough, the rewards are worth it in the long term.

The best way to maintain your progress is to be as consistent as possible. By doing so, you’re building habits that’ll propel you forward. Ensure you make few or no exceptions in terms of recording purchases and be honest with yourself about whether you can afford an item or service.

As we’ll touch on later, working with a financial advisor may be another way to stay on track. These experts can guide you and hold you accountable if you stray from the plan.

Benefits of Budgeting

Budgeting requires effort and discipline. However, with hard work comes great rewards. After you’ve been managing your cash flow for a few months (or even just one) you may start to see the benefits, including:

  • Feeling like you have more control over your money.
  • Spending less on items or services you don’t need or want.
  • Being able to save and invest more.
  • A feeling of empowerment over your life and financial future.

Taylor Kovar, a certified financial planner (CFP) and CEO of Kovar Wealth Management in Lufkin, Texas, outlines the benefits of budgeting as empowering you to “take control of your finances” and ensuring you “live within your means, prioritize essential expenses, and save for future goals.” Overall, having a plan keeps you on track and “reduces financial stress” on you and your family.

How a Financial Advisor Can Help

If you feel like your monetary situation is too difficult to handle or you don’t know where to start, it may be wise to hire a financial advisor. These professionals can work directly with you to plan investments, strategize savings tactics, and manage your cash flow. Kovar points out that advisors “bring expertise and an external perspective,” which can be invaluable.

Another benefit of working with a financial advisor is “accountability,” says Kovar. Much like how a doctor knows about the state of your well-being, an advisor will know when you aren’t sticking to the plan or if something isn’t working. In this case, Kovar emphasizes, they can help you “make necessary adjustments over time” so you can achieve your goals.

When you look for an advisor, be sure to find someone who is fully qualified to help you and has your best interest in mind at all times. For budgeting, you should look for a financial planner, which typically carries either the CFP or chartered financial consultant (ChFC) designations. These experts specialize in analyzing various aspects of your finances and mapping out comprehensive plans to fit your needs.

If you need help finding a professional near you, we recommend using a free matching tool, like this one. After answering a brief set of questions about your financial situation, it’ll pair you with up to three vetted local advisors.

Frequently Asked Questions

Who needs to be on a budget?

Most people should probably be on a budget of some sort. It’s smart to keep track of your money so that you can worry less about it. People who view their finances as a pain point or source of stress in their lives should be paying attention to their spending habits.

What is the 50/30/20 rule? Is it a good idea?

According to Kovar, the 50/30/20 rule is a “simple budgeting guideline.” It “suggests that 50% of your income should go to necessities (like housing and food), 30% to discretionary expenses (like entertainment), and 20% to savings and debt repayment.” Essentially, it’s a basic layout you can follow to ensure you practice smart spending habits.

The 50/30/20 rule can be a good idea to figure out where you want your money to go. However, it’s a very basic outline, and “it’s essential to adjust based on individual circumstances and goals,” says Kovar.

What is the 30-day rule?

This is another strategy people use to help with budgeting and cutting their spending. The goal of the 30-day rule is to curb impulse buying. For example, if you come across an expensive, yet valuable item, such as a 4K 65-inch TV, you might want to buy it immediately. Instead, you’d wait 30 days and then reassess your wanting to buy it. This helps the initial desire to buy wear off and makes you less likely to spend money on a whim.