Congratulations, if you are reading this, that means you are taking an important step in improving your financial life. Budgets aren’t only for governments, businesses, or the financially savvy. Everyone can benefit from knowing how to create a budget. A budget is a road map and blueprint to your financial goals. It also helps you target and stay on track with your financial plans. Whether you’re trying to determine how much you spend on entertainment or whether you’re on track to save for your kids’ college education, a budget is the best way to do it. For those that have never created a budget before, the process can seem intimidating, but don’t be discouraged. Instead, be excited because creating a budget gives you the power to take control of your financial life. You wouldn’t take a road trip to a place you’ve never been before without a GPS or a map. So why would you go about your life without a budget? You shouldn’t. Here are the steps to creating a budget.

1. Calculate All The Money You Have Coming In

I’m old-fashioned. I like jotting things down on paper, but you can use your phone, an Excel spreadsheet, or a Word document. Add together all sources of income that you are currently receiving. If you have more than one job, a side hustle, or receive financial gifts or allowances on a regular basis, add them all together. It’s common to organize your income on a monthly basis. You’re not limited to calculating your income on a monthly basis. You can organize your income weekly or quarterly (three months), but it’s common for a personal budget to organize your income monthly. Also, many expenses are due on a monthly basis, with the exception of some being yearly. In the case that you are paid yearly or have an expense that’s due yearly, just divide the total by 12, and you will get the monthly number. Make sure you are adding together your after-tax income. For those workers who do not have taxes taken out of their income and have to pay taxes separately, determine your after-tax income before adding everything together.

2. Calculate All The Money You Have Going Out

Making a list of your expenses will take a little bit more effort than making a list of your income. Fixed recurring expenses such as rent, mortgage, phone bill, and subscriptions will take less effort to determine. Variable recurring expenses such as electric bills, fuel for your car, food, and discretionary spending will take some effort to track. If you pay your expenses with electronic payments, you can check your statements to get an idea of your expenses. Gather at least three months of credit card and bank statements. Be mindful of the possibility that you could be understating some of your costs if you sometimes pay with cash. Humans are not great at estimating their usage, so I suggest you track all expenses for an entire month to get a good idea of how you’re spending money. You can write it down on a piece of paper, make notes in your phone, or use a spending tracking app. The goal is to get an accurate account of your spending for an entire month.

3. Determine Your Available Funds

After you have determined all your income and all your expenses, subtract your expenses from your income. The result is your available funds. Hopefully the number is positive, which is a surplus. If the number is $0, then you broke even and you have a balanced budget. If the number is negative, that means you’re running a deficit. This means you’re borrowing or using debt to cover your monthly expenses. You do not want to be in this position. You do not want to be in a position where you are spending more money than you have coming in.

4. Determine Your Goal

At this point you should determine the goal of your budget. What is the purpose of the budget you are creating today? Are you budgeting to get control of your spending? Are you budgeting because you want to buy an expensive item in the future that you can not afford today? Whatever your goal or reason, you need to decide because that will determine how you organize your spending. At this point you do not have a budget as yet. What you have here is a snapshot of your financial situation. You know how much money you have coming in and how much you have going out, which is your cash flow. From this point you can determine how you want to spend your money, which is the budget. In essence, a budget is a spending plan. How you determine to spend your money each month, along with tracking how you spend your money, is a budget. A spending plan without a goal is just a list of transactions.

5. Determine How You Want To Spend Your Money

Your situation will determine how you organize your budget to meet your goal. You may discover that your expenses far outweigh your income, and you can cut back on some of your spending. You could also discover that you can not cut back on any of your expenses due to their necessity. In this situation you may consider ways to increase your income. These are just some examples of scenarios you may find yourself in. Based on your situation, you will then decide how you want to budget your money.

It’s important to make a record of this. Make a note in your phone, create an Excel spreadsheet, or just write it down on a piece of paper. Make a note of what month the budget is for. For example, for January’s budget, I also like making a note of what date I created and adjusted the budget. If you’re planning to maintain the same budget for an extended period of time, say for a year, you don’t need to put the month, but you could put the year. Then you should list all of your expenditures along with how much you’re planning to spend. For example, emergency savings $200, retirement $100, rent $800, car note $300, insurance $200, groceries $200, dining out $150, and entertainment $150. At this point you have your budget, but the work is not done.

6. Keep Track Of Your Spending

You now have your spending plan that will ensure that you meet your financial goals, whatever they are. We are not quite done. Now we have to keep track of our spending to ensure that we are staying on budget. There is no point in creating a budget and not tracking your spending. There are many ways you can do this. If you are new to creating a budget and keeping track of your spending, I suggest trying out different methods. Be patient with yourself. It may take some practice and trial and error until you find a method that suits you. If you decide to track your spending by writing it down. I suggest you get a notebook. Do not use loose paper. They are easily misplaced and vulnerable to damage. Another option is making notes in your phone. This is very convenient because most of us always have our phone with us. It makes it easy to record a spending transaction after you make it. If you choose to use an Excel spreadsheet, you can benefit from the software’s calculating features. When you record your expenses in a notebook, you have to manually make calculations, which can lead to errors. A great option that combines the convenience of your phone and the power to calculate like Excel is a spending tracking app that you can download on your phone. There are many out there; it’s up to you to find the one that suits you.

A budget is a very important and useful tool anyone can benefit from. It is also flexible and can be used in many different ways. You may find yourself in a situation where you are behind in keeping up with your debt due to an unfortunate situation. You can use a budget to organize your debt and create a spending schedule to repay your debt. You may have created a budget for a vacation, and the budget is the reason why everything went smoothly. We all can benefit from having a budget.