Governments, companies, and individuals need a budget to keep their finances in order. If you’re looking for a way to create a personal budget, you’re in the right place. But first things first, what is a budget?

A budget is a plan that estimates the amount you spend on your needs, wants, savings, and debt repayment, for a specific period. You can budget monthly, quarterly, or annually, but the most common is monthly.

Next, let’s look at a step-by-step guide on how to create and stick to your budget.

6 Steps to Create a Budget

One of the most common budgeting methods is the 50/30/20 rule. The model stipulates that you should spend 50% of your income on necessities, 30% on wants, and 20% on savings and debts. We will use this method in our guide because it‘s one of the more effective ones out there.

Calculate Your Income

The first step in coming up with a budget is to know your monthly income. If you’re employed, your monthly salary could be your income. But you need to use the net instead of the gross salary to avoid income overestimation.

For freelancers and business owners, you can track your income for three months and find an average. In this case, you should use income after tax and other business expenses.

Track Spending

Once you have a clear picture of your take-home income, you should monitor how you use the money. Place your expenditures into two caterogies:

• Fixed expenses: Rent, mortgage, car loans, monthly savings, utilities, etc.
• Variable expenses: Food, groceries, entertainment, gas, etc.

Fixed expenses are usually constant from month to month and unavoidable. On the other hand, variable expenses consistently change and provide opportunities to adjust your budget.

You can record your expenses with the help of apps or on your own, depending on your spreadsheet skills. Your credit card can also provide useful information on monitoring your spending.

Set Goals

After knowing the amount you earn and how you spend it, the next step in creating your budget is to set goals. The objective of a budget is to help you live within your means and finance your short and long-term goals.

Your short-term goals could include clearing your household loans or setting an emergency fund. The goals should be achievable within a maximum of three years.

Long-term goals may include items like buying a house or saving for retirement. They usually take more than five years.

The SMART (specific, measurable, actioned-oriented, realistic, and time-bound) model is one of the more popular goal-setting techniques.

Make a Plan

How are you going to finance your budget? The 50/30/20 rule can help you formulate a plan that caters to your needs now and guarantees a comfortable retirement.

You can categorize your expenses into needs and wants to know what you can forego to finance your plan. For example, if you realize you’re spending a lot on gifts and donations, you could reduce that and redirect the funds. Making a plan is about setting priorities.

Adjust Spending

After coming up with a plan, the next step is to take action. Most people come up with plans (budgets) but never implement them. It’s not only in governments and companies.

Identifying opportunities to adjust your spending may require a financial advisor’s assistance. Most people assume they’re okay until they asses some aspects, like preparing for retirement. Therefore, you need someone who can guide you through the process.

Analyze, Review, and Adjust

When it comes to budgeting, nothing is cast in stone. You should do a reality check after 3 months to analyze your progress. The assessment helps you identify areas you’re off-track and opportunities to adjust your budget.

Budgeting is a continuous process because our incomes and expenses keep changing. You can receive a salary increment that calls for an adjustment in your distribution. Conversely, your income may decrease beyond what you had expected, and you may have to readjust your spending.