How to Build Your First Budget
Building your first budget is an empowering step towards taking control of your finances and achieving financial stability. A well-structured budget provides a roadmap for managing your income, expenses, and savings effectively.
But if it’s your first time, it can feel intimidating! Don’t worry, we’ve got you.
Follow along as we outline the steps to build a budget from scratch so you avoid living paycheck to paycheck and pave the way to financial success:
Step 1: Gather Your Financial Data
Begin by understanding your current financial standing. Calculate your total income, considering all sources of revenue, including your salary, freelance work, or side gigs. Gather your financial statements, bills, and receipts to gain a comprehensive view of your regular expenses. This assessment will serve as a foundation for building your budget.
Step 2: Track and Categorize Your Expenses
To create an accurate budget, start by tracking your expenses for a month or two. Categorize them into fixed expenses (rent, utilities, loan payments) and variable expenses (groceries, entertainment, dining out). This exercise will help you identify spending patterns and areas where you can make adjustments to save money.
Pro tip: Your credit card company may do this for you and you can export the data into a CSV file for easy analysis and filtering.
Step 3: Define Your Financial Goals
Establishing clear financial goals is essential for effective budgeting. If you’re just starting out, your first goals should be paying off any high interest debt (credit cards) and building up an emergency savings fund. From there, determine your short-term and long-term objectives, such as saving for a big trip, a car or house, or planning for retirement. Clearly defined goals will guide your budgeting decisions and motivate you to stick to your plan.
Step 4: Calculate Your Income and Expenses
You’ve set your goals and you have your income and spending data, so now it’s time to do the math. Start by listing all your sources of income and their respective amounts. Next, do the same with each of your expense categories. Ensure you account for both essential expenses and discretionary spending, and don’t forget things like debt and loan payments!
Subtract your expenses from your income, and what’s leftover is your savings. This number tells you on average how much you can currently save per month.
Ask yourself – does this saving amount help me achieve my financial goals? If the answer is yes, great! If not, it’s time to review your budget and make some changes. (And if that number is negative, it means you’re living beyond your means, and should definitely cut back on some spending).
Step 5: Cut Unnecessary Expenses
Review your variable expenses and identify areas where you can reduce costs. Look for subscription services you no longer use, follow up on charges you don’t recognize, and negotiate bills like cable or internet. Also, if you have credit card debt, you’re paying interest payments, so getting that paid off will also save you money that you can redirect towards your savings goals.
Step 6: Determine Discretionary Spending
Discretionary spending is often the easiest place to identify places to save and cut back on spend. Discretionary expenses are spending categories like entertainment, dining out, hobbies, and personal care. When you review your expenses, ask yourself where you feel comfortable cutting back in service of your financial goals. Remember to keep this spending within reasonable limits to avoid overspending.
Step 7: Prioritize Essential Expenses
If you’re looking to cut back on expenses, essential spending is often a place where you can see a big impact, but these changes often take longer to make. For example, getting a cheaper apartment or a roommate can significantly reduce your rent, which is often the biggest piece of your budget, but that’s a hard change to make overnight. Be realistic and determine what changes you need to make to essential expenses to ensure that your allocated amounts enable you to achieve your goals..
Step 8: Establish a Plan, Monitor and Adjust
Iterate on the last few steps until you get to a savings amount you feel comfortable with. Start by setting aside a certain amount for emergencies, and then contribute to longer term savings and retirement. A small but consistent contribution is enough if you're just getting started. As you progress, aim to increase your savings to accelerate your financial growth and provide a safety net for unexpected expenses.
Building a budget is an iterative process – unfortunately, it’s not set and forget (unless you live the exact same every day, every month, every year…but how boring is that?).
Regularly monitor your expenses and compare them against your budgeted amounts. Budgeting apps or spreadsheets make this easy. If you’re someone who feels their skin crawling at the thought of doing this, fear not, that’s where we come in. Habit Money can help you automate your expense tracking and keep you accountable to your budget and goals, and suggest adjustments to your budget to ensure it remains realistic and aligns with your financial goals.
