7 Steps To Creating A Personal Budget
**This post has been updated for 2021**
If the pandemic has taught us anything, it’s that a personal budget is crucial to financial stability. Your old budgeting ways may not serve you during this unprecedented time. When it comes to creating a personal budget, many people have the idea that the goal is to strip you of anything and everything fun that you enjoy. The end of eating out and shopping. This is not the case. Its purpose is to give you a clear picture of how much income is coming in vs how much you have going out. It it is a crucial tool when it comes to creating a solid foundation that will lead to a healthy financial future. You will feel in control, which will allow you to get the full benefit of your money.
What new spending patterns have you adopted
When you have calculated what your expenses are and you subtract them from your income, you have your discretionary income left over. With the pandemic, this part of your budget has most likely changed. You may be spending more on groceries and other “pandemic” friendly activities. Figure out what your new spending patterns are and adjust your budget accordingly.
Below are 7 steps to setting up a personal budget
1. Compile necessary items
In order to get started on your personal budget, you need to have all the necessary numbers and paperwork so you can prepare a complete one. Some of these items include:
- Monthly utility statements
- Monthly receipts
- Bank statements
- Pay stubs
- Credit card statements
- Any loan information
2. Choose a personal budget method
When it comes to creating, tracking and monitoring your personal budget, there are 4 methods. Each one is different, but they all are focused on details and organization.
- The pen and paper: This old school method still does the trick. You just jot down all your sources of income and all your expenses.
- The Spreadsheet: Excel would be the software of choice for this method. You can find free samples online so that you don’t have to start from scratch. You can organize all the details easily and the math is done for you.
- Free software: Websites like Mint.com and Finovera are free and are great budgeting tools. These programs are great because they give you a clear picture of your expenses and your spending all in real time.
- Financial software: Quicken would be the most popular of this category.
3. Set goals for your personal budget
Sit down and give some thought to the financial goals you want to achieve with your finances over the next year. By doing this, you are setting yourself up to make the best spending choices.
- Establish a solid financial foundation – 2020 was a rough year financially for so many Americans. 2021 needs to be about rebuilding and getting back on solid ground. This looks like organizing all your financial accounts, having a budget, paying off debt and saving for retirement.
Adjust your emergency savings plan – Experts have always recommended saving at least three to six month’s worth of expenses. With that being said, many people may have realized it was not enough during this pandemic. If your emergency fund was depleted in 2020, it is high priority to build it back up again.
Open an FSA or HSA – If 2020 landed you in the hospital or with medical bills, you may want to be more prepared moving forward. If you are not signed up for a health savings account or flexible savings account, you should consider it.
4. Determine income and expenses
Many of us are on autopilot with no real idea of how much we really are spending. A few Starbucks a week can really add up. Take a few weeks and track your spending. Make a note of every cent you spend. You may be surprised to see how much money is going out the window.
5. Separate out needs and wants
When you are contemplating whether to buy something or not, ask yourself whether your purchase will put you closer to your financial goals. Take a day before making a purchase and see if you still want it after you have taken some time. You also want to take the time to set up clear priorities for yourself. This will help your decision making process much easier.
6. Unexpected expenses
There will always be expenses that can arise at anytime. Whether it is new breaks or a medical expense, you should start up an account for these unexpected expenses. The next time you get something on sale or with a coupon, put those savings into this account.
7. Get started with your personal budget
When it comes to your money, you want to feel like you are in control of it. Mapping out your spending will help you out with that. The 50/20/30 rule is a great place to start. 50% should be allocated towards essentials (utilities, housing, groceries etc), 20% towards savings (retirement, debt, and savings) and 30% to personal spending (travel, shopping, dining etc). Be sure to track spending by using any of the helpful smartphone apps for budgeting.
8. Don’t spend every cent
When setting up your budget, you may think you should allocate every last dollar. This should not be the case. You want to leave a little bit of leg room for times when you may need to spend extra money on groceries for example. Locking yourself into a rigid budget can lead to you getting into debt. If you don’t have the money to pay for the increase in your utility bill, you may wind up putting the payment on your credit card. So when adding a line for your income, knock a $100 or so dollars off.
For those with credit card debt
If you are carrying credit card debt, there is a credit card on the market that will allow you to pay 0% interest for 18 months on balance transfers AND new purchases. Also, no annual fee. This is the only card on the market like this and can really help you get control of your debt.
Monitor Your Progress
As you start using your personal budget and it is working for you, you have one last step. You now need to closely monitor your budget to ensure it is still keeping you on target for your financial goals. Try to dedicate at least an hour a month to this. If you find that your numbers are off, try trimming off any expenses that you can. As you start having extra money to put towards savings, you can begin investing it.