When it comes to budgets, it is less about if you should have one and more about how to create a budget plan. There are many ways to go about this, but let’s start simple and go from there. All of these budgets are something you can start today without a lot of effort or pulling your hair out.
How to Create a Budget Plan the Easy Way
The best place to start is with your income. You’ll want to use your net income. That means what you take home after all of the taxes are taken out and any other deductions you may have that come out of your check before you are paid.
For example, if you make $2,000 a month, after federal, state, and social security taxes are subtracted, you might bring home $1,500.
Depending on your personal situation, you may also have garnishments taken out for unpaid student loans, back taxes, or child support.
It’s important when figuring out how much money you have each month that you use this figure, so you don’t overestimate your available income.
Tip: To make it simple just use the take-home amount on your check.
How to Create a Budget Plan – Expenses
There are certain expenses that remain the same month in and month out. These are called fixed expenses. When it comes to how to create a budget plan, once you’ve determined your take-home income, it is best to make a list of all of your fixed expenses.
This might include things such as:
- Rent or mortgage payment
- Cable bill
- Phone bill
- Car payment
- Insurance payments
These are expenses that typically don’t change very often, if at all, and are normally bills you have each and every month, so once you make a list of these, you will see how much you have left to pay your variable expenses.
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What are Variable Expenses?
Variable expenses are expenses that you usually have each month but the amount changes from month to month. These can include things such as your water bill, your electric/heat bill, and groceries.
These are all must-haves but the amount each month can vary quite a bit depending on where you live and the time of year.
When you have an expense with such a large range like this, it is best to add up your total yearly cost and then average it for your monthly budget. That means if you have three high months as I do, and then some lower one, your yearly expense might be something like $1839.
Instead of scrambling to pay three months of super high heat bills in the winter, instead, divide the total amount, $1,839, in this case, by 12 which gives you $153.25. This is how much you should be budgeting for this expense each month.
That way, when you come to those higher months, you will have the month already set aside from the months you didn’t spend as much.
Other variable expenses include things such as:
- Credit card bills
- Misc expenses
Finally, you also have discretionary spending. Discretionary spending includes things such as going out to eat, getting Starbucks, entertainment, and so on.
Tip: One of the easiest ways to determine all of your spending is to go back through your bank statement and make a list of all your spending. If you do this for three months or more, you’ll quickly see where all of your money is going.
How to Create a Budget Plan – Setting Goals
Before you start to consider where to cut back, you want to have a clear idea of what your goals actually are. Do you need an emergency fund? Are you saving for retirement?
You should consider short-term goals and long-term goals. Short=term goals should take no more than a year. Long-term goals may take many years.
Some short-term goals include:
- Building an emergency fund
- Paying off credit card debt
Some long-term goals include:
- Saving for a down payment on a house
- Saving for your retirement
- Saving for your children’s college education
- Paying off your car/home early
Once you know what your goals are, be sure to write them out. It helps motivate you when you can see what you’re working towards.
Now that you’ve got an idea of your income, expenses, and goals, it’s time to make your plan.
How to Create a Budget Plan – The Final Step
There are two ways to have more money in your savings account. One, you can bring more money in which means a major change such as working more hours, getting a second job, or finding a better paying job.
All of these options may be doable depending on your personal situation, but let’s set them aside for now, and go to the second way to have more money, and that’s spending less.
Starting with your discretionary spending, see where you can start to cut back. You want a balance between overspending and not being able to enjoy your life. See where you can make small changes, to start, that will help you start to save.
These can be things such as:
- Making your lunch at home
- Using coupons
- Going to movies during the afternoon
- Cutting back on Starbucks
You may find that you can save a quick $100 or more just by cutting back on your discretionary spending.
When it comes to how to create a budget plan, you’ll then want to take a look at your variable expenses. Making changes here can really start to add up.
In fact, groceries can be one of the largest expenses for a family. If you can cut back here, you could add another $100 a month or more to your savings.
Ways to cut back on groceries:
- Only go to the store once a week (I do this and it really works!)
- Use coupons
- Check flyers
- Use apps to find local specials
Finally, your largest savings can come from your fixed expenses, but these tend to take larger changes in your lifestyle, so don’t start here and don’t just jump in. Give it some thought first, and give yourself a couple of months with making smaller changes to see how that goes and how much you’re saving.
Once you’re ready to take the leap, here are some changes you can make that will save you $100’s of dollars if not more each month when combined.
- Ditch the cable (Use Amazon Prime and Netflix or other streaming services)
- If you have a home phone get rid of it
- Take public transportation when possible or get rid of your car altogether
- Downsize and move to a smaller home or apartment
These are all major life changes, so don’t make them lightly.
Once you have made a plan and know how much you want to save and how quickly you want to save it, you can take the steps to do so.
Once you’ve figured out how to create a budget plan, keep in mind that it isn’t written in stone and you should review it and make changes as necessary and as your saving habits and needs change.