Budgeting 101: How to Make a Budget in 5 Actionable Steps

Budgeting budgeting 101

Creating a budget can offer you peace of mind and give you more confidence in managing your finances. A basic budget is all you need to take charge of your money—and help achieve more of your financial dreams.

Intro to Budgeting: What is a Budget? 

A budget is a financial outline designed to measure and guide your income and expenditures for a certain period of time, such as one month, a quarter, or a year. With a budget, you can track the amount you’re making compared to what you’re spending and saving. 

Why do I want a budget? Consumer.gov says making a budget can help you determine where you should be spending money and in turn, show you where you should limit your spending and what you can afford to spend more money on.  

There are many ways you can maintain a budget — with a spreadsheet, paper and pen, or through a budgeting app.

Whether you’re new to managing your own finances, never learned how to budget, or are tired of living paycheck to paycheck, this post is for you. In our Budgeting 101 guide, we’ll go over budgeting basics, show you how to create a budget, teach you how to avoid common budget-related mishaps, and ultimately, give you a budget calculator and the tools to create a budget that’s efficient and functional for your lifestyle. 

Need to know how to create a budget ASAP? Read end-to-end for a comprehensive course in Budgeting 101.

How to Create a Budget: 5 Actionable Steps

To set up your budget, you’ll need a few key pieces of information. With these basic components, you’ll have a foundation for your budget that you can tweak as the months go by and as your financial circumstances change. To get you a step closer to your financial goals, let’s go over how to create a budget step-by-step.

1. Calculate your monthly income after taxes

An accurate monthly income is the cornerstone of a successful budget. Without figuring out how much money you actually have in your wallet, it’s pretty hard to allocate funds towards saving, spending, and settling outstanding debts. But calculating your monthly income takes a little bit more effort than glazing over your monthly paychecks.

To find out how much you’re actually earning, you’ll need to do a little bit of simple math—don’t worry, we’ll walk you through the entire way.

Calculating your monthly income as a salaried employee

One of the benefits of being a salaried employee is knowing exactly what to expect on your paycheck—month in and month out—and this pay structure will serve as an added perk when you’re building a monthly budget. To calculate your pre-tax monthly income as a salaried employee, all you need to do is divide your annual salary by 12.

Now that you have your gross monthly income figured out, you’ll need to deduct taxes and other expenses that may dock your pay—such as medical benefits and contributions to an employer-sponsored retirement plan. We’ll show you how to estimate this number in just a moment, but first we’ll go over how hourly employees can calculate monthly income.

Calculating your monthly income as an hourly employee

 If you’re an hourly employee, your monthly income isn’t always as consistent as you might like it to be, but with the proper budgeting technique you can definitely nail down a budget that maximizes your monthly income and gets you closer to meeting your greater financial goals. Here’s how to figure your monthly income as an hourly employee:

Let’s take a look at an example:

Keith is an hourly employee who makes $15 an hour working 40 hours per week, making his gross weekly income $600. Keith multiplies this number by 50 to reflect the weeks he plans to work throughout the year (minus his two-week vacation). Then, he divides by 12 and estimates that his gross monthly pay is $2,500.

Remember, this number does not factor in the deductions that may impact his take-home pay, so now he’ll have to subtract these from his gross monthly income to get an accurate picture to build his monthly budget.

Subtract taxes and other deductions from your gross monthly income

To get the most accurate picture of your monthly take-home pay, you’ll need to subtract taxes and other deductions from your income.

  • Federal Taxes: To find out your federal tax liability each month, refer back to your annual gross income that you calculated before. Then, compare your income to the federal income tax rates to find out what percentage of your income will go toward your federal income taxes. Once you’ve found this number, divide by twelve to estimate your monthly tax liabilities.
  • State Taxes: Calculating your state income taxes is essentially the same as finding your federal tax liability, but this time, you’ll need to refer to your state’s income tax rates. Multiply your annual income by your tax rate, then divide by twelve to see how much you’ll owe in taxes each month.
  • Social Security and Medicare Taxes: According to the IRS, the federal withholding rates for FICA are:
          -6.2% for Social Security
    -1.45% for Medicare
  • Misc: Depending on your financial situation, you may have other deductions to consider when calculating your monthly take-home pay. Use previous paychecks to help you determine how much money will be withheld to account for 401k contributions, benefits, etc.

2. Identify fixed and variable expenses

Once you have a clear picture of how much money you’re actually working with each month, it’s time to figure out how you’re spending it…or how you should be spending it. There are two main types of expenditures you need to account for as you build your budget: fixed and variable expenses. The difference between the two is that fixed expenses tend to cost you the same amount each month while variable expenses…vary. 

Fixed expenses

Your fixed expenses like rent payment, utility bills, groceries, transportation, and health care costs are likely to absorb a large chunk of your budget, which makes them all the more important to track as the months go by. 

To determine how much of your budget is going towards fixed expenses, start by creating a list of your regular expenditures. Here’s a list of common fixed expenses to help you get started:

  • Rent
  • Mortgage
  • Utilities
  • Car payments
  • Student loans

Once you’ve built a complete list, calculate a monthly estimate for each one, so you know how much of your income should be dedicated to it. If you’re not sure how much something costs, review previous bills and credit card statements to see what you’ve spent in the past.

Variable expenses

Whether you belong to a gym, go on a weekly date, or have a Netflix subscription, make sure you account for these costs in your budget. As opposed to fixed expenses that stick to relatively the same cost each month, these miscellaneous items may change month over month. 

Some examples of variable expenses include:

Determining how much you spend on variable expenses each month can be tricky since it may be rarely  consistent, but it’s important to get a close estimate so that you can determine whether you can maintain the same spending habits or if you need to cut back in certain areas. Use your monthly bank statements to help you estimate your variable expenses, and in turn, set limits for each category.

How to factor expenses into your budget

If you’re using one of our free budgeting templates, simply input the values of these fixed expenses into your budgeting spreadsheet to help plan out your financial strategy each month. In the Mint app, you can connect your bank account to easily identify recurring expenses, or enter in your own budget for fixed expenditures. 

3. Set savings and debt payoff goals

As you saw in step two, if you have student loans and credit card balances, you’ll want to attribute part of your monthly budget to paying them off. Each month, allocate a certain amount to these monthly payments. The sooner you pay off debts, the less interest you’ll pay overall, and the closer you are to meeting your greater financial goals.

When creating a personal budget, include these types of debts into your planning:

If you’re all caught up on your bills and want to want to stow away funds for retirement or save up for a new car, it’s helpful to establish concrete goals, then break them down into achievable bite-size chunks. Having trouble coming up with realistic, meaningful financial goals? Take a look at these short-term and long-term examples:

Short-term financial goals

Long-term financial goals

  • Establish a retirement account
  • Pay off your mortgage or student loans
  • Start your own business

If you’re using the Mint app, you can set up custom goals for your savings in the budgeting section. Simply add a budget, define a dollar amount, and monitor your progress.

4. Record your spending

You know that feeling when you’re checking out at the grocery store, the cashier announces your total, you swipe your card, and by the time you’re loading your grocery bags into your car, you realize you didn’t even register the total amount you paid. It’s a concerning, out of body experience—but we’ve all been there.

This is why tracking your spending is so important. It’s easy to become complacent about the amount of money you’re spending and end up with revolving debt ruling your finances.  Depending on the budgeting method you choose—budgeting app, pen and paper, or online budgeting tool—you can pick a way to record your spending that best suits your lifestyle.

Here are a few tips to make expense tracking easier and more efficient:

  • Ditch the Cash: Stick to card payments if you have trouble keeping tabs on how much money you spend each month. This way, you can refer to your online bank statements to easily monitor your spending.
  • Check Yourself Before You Wreck Yourself: Make it a point to analyze your spending habits on a weekly basis. Collect any receipts or statements you have and check to see if you’re on budget or if you need to reel in your spending for the rest of your budgeting cycle.
  • Go Old-School: If you’d rather skip the technology and take a more tactile approach to budgeting, a pen and a checking book will do just fine. Just be sure to make a habit of recording your expenses as soon as you’ve swiped your card.
  • Try the New-School Way: If you can’t be bothered to whip out a pen and paper each time you check out at the register, automated expense tracking might be a better alternative. Using the Mint app, you can connect your bank account to effortlessly record your spending and monitor transaction trends.  

5. Track your budgeting progress, review, and revise

Creating a basic budget is a huge financial victory. It helps you ensure you can cover your expenses and reach for exciting milestones, like buying a house or paying off your student loans. As you continue to budget, make adjustments as you see fit. Your income, expenses or lifestyle might change, and it’s important to ensure your budget keeps working for you and your future.

Make it a point to review your budget on a regular basis—each week, every month, or at least every quarter to see if any major changes, or milestones have taken place. Not only will this help you recognize and celebrate your successes, but it will also encourage you to reevaluate and tailor your strategy as needed. 

Budgeting Breakdown for Beginners

Now that you know how to make a budget, it’s time to discuss best practices and budgeting basics to ensure your budget works for your money and your lifestyle. 

How to Choose the Budgeting Style That Works for You

Here’s the thing about budgeting. There’s not really a one-size-fits-all approach that works for every individual. Depending on your spending habits, financial goals, lifestyle, and your relationship with money in general, one budgeting tactic might make more sense for you than another. Let’s take a look at a few budgeting methods you can try.

Keep tabs on transactions with the envelope method

The envelope system is a simple budgeting approach that involves spending with cash instead of plastic.

If you budget $100 for eating at restaurants, put that amount into an envelope. When the money’s gone, you have to wait until next month to eat out again.

If you budget $200 for groceries, put $200 in a “grocery” envelope. If you’re at the checkout line and the total comes to $203, you’ll need to put something back.

The envelope method helps you be more strict with your budget. The pockets of cash are a visual and tangible reminder of how much money you’re dedicating to each area of your life.

Follow the 50/30/20 rule

Financial experts recommend the 50/30/20 guideline as a basic financial strategy, especially for young professionals. You can also use the new 50 30 20 budget calculator to help create your new budget.

The rule says that you should allocate a 50%, 30%, and 20% of your income to the following categories:

  • Essentials: 50%
         -Rent/Mortgage
         -Utilities
         -Debt payments
         -Bills
         -Groceries
  • Personal Expenses: 30%
         -Entertainment
         -Dining out
         -Date night
         -Shopping for non-essential items
  • Savings: 20%
         Emergency savings
         -Retirement account
         -Travel fund
         Rainy day fund

Consider a zero-based budget

With the zero-based budget technique, each month begins and ends with zero dollars. When you build out your zero-based budget, every dollar has a purpose. Let’s take a look at a sample budget using the zero-based method. If you make $3,500 every month, attribute each dollar to an expense. You might put $1,750 toward living expenses, $700 toward paying off debt, and $1,050 toward personal expenses like going to the movies or saving for vacation. At the end of the month, your balance is zero, because every dollar is accounted for.

Keep in mind, the zero-base doesn’t mean you’re spending every dollar that you earn, but rather, that each one is allocated to a different category—savings account included!

Selecting a Budgeting Tool That Suits Your Lifestyle

As we mentioned before, the one-size-fits-all methodology is a no-go when it comes to personal budgeting. Your financial situation is completely unique to you whether we’re talking about your income, expenses, or your financial goals, so it only makes sense to tailor your budgeting strategy to your individual preferences.

Here are a few tips to help you find a budgeting tool that makes sense for you:

  • Read reviews, or ask around: Although money can be considered a taboo topic, that doesn’t mean you need to tip-toe around budgeting techniques in your relationship or with your friends. You probably trust their opinions more than anyone else, after all. See which tools they use and ask what they like and don’t like about their current budgeting method. 
  • Test it out: Before buying into any paid budgeting subscriptions, give the free trial a go. This way, you’ll be able to familiarize yourself with the features and decide if it’s a tool you’d continue using.
  • Consider compatibility: If you’d like to automate your expense tracking, make sure that the budgeting tool you want to use can be integrated with your bank and credit card issuers.
  • Use a template or tool tailored to your needs: Depending on your financial circumstances, you may need a simple budget, or one that’s specific to your income and expenses. Or perhaps you’ll need additional functionality like investment capability or the ability to make peer-to-peer transactions. According to a recent survey, 55% of Americans use a full-service banking app. As you select a budgeting tool, consider how you’ll use it and how the tool fits into your lifestyle and financial goals. Our budget templates include the following categories:

Common Budgeting Obstacles and Mistakes

Before you set sail on your journey towards better budgeting, it’s time to talk about some of the obstacles you may encounter on your way. Like most things in life (or the sea in this case), budgeting isn’t always clear-cut—there can be aspects that are difficult or ambiguous. Factoring in random, one-time expenses or calculating a part-time gig can complicate your budget, but trust us, your voyage can (and must) continue! Here are a few tips to ensure you have the most accurate budget—no matter the circumstance.

1. Estimating irregular income

If you’re a freelancer or work a side hustle, you likely have an irregular income that can be hard to predict. In these cases, it’s best to estimate a conservative (low) amount, so you don’t overspend. Review the past 3-6 months of income and watch for any patterns. Can you find an approximate hourly rate or weekly rate for what you bring in? If you’re new to a job, like being a waitress, ask a coworker how much they typically make in tips to help you forecast your monthly tip outs. Above all, do your best to create an income estimate—knowing you can tweak it along the way.

2. Paying for emergency expenses

Unfortunately, accidents and unexpected bills happen to everyone. From car troubles to job loss and medical expenses, emergencies can be expensive. An unexpected bill can throw off our budget, and set you back. If an incident does occur, try to factor the expense into your budget while paying your other bills. For instance, you may want to cut back on dining out for the month, or pick up an extra shift to help you cover a bill. If you can, build an emergency fund into your budget to safeguard your finances against future unexpected situations. 

3. Forgetting one-time expenses

Items like annual memberships, vacations, and gifts for family and friends are often forgotten when creating budgets. If you can, set aside a small amount of cash every month for these extra expenses. You can estimate the expected cost for the year and account for them in your monthly budget. For example, if you typically spend $300 on Christmas gifts, set aside an extra $25 every month to account for these added expenditures. By the time December comes, you’ll have the cash available to spend on gifts.

Key Takeaways: Budgeting 101

  • Creating a budget is really as simple as following these five steps:
    • Calculating your take-home pay
    • Estimating your expenses
    • Setting savings and debt payoff goals
    • Recording your spending
    • Tracking your progress
  • To find the right budgeting method and tools for you, consider compatibility, ask around, and try out different options
  • Avoid budgeting pitfalls by preparing for unexpected circumstances and tailoring your budgeting strategy as needed

Sign up for Mint to help you stick to your budget and goals

Let the Mint app do the heavy lifting for you. It can calculate your income, total your spending by category, and help you conquer your savings goals. Tracking expenses with the app is simple and accessible—no matter where you are. 

 

 

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Comments (8) Leave your comment

  1. I would love to learn more from mint on how to incorporate a “zero-based budget” onto their platform. I can put $100 aside for vacation costs, but when I actually go on vacation I spend all that again. How do I track how much is in vacation budget and then make sure that when I go on vacation I am staying within the amount I saved? I get that I could hide the actual expenses from my mint ledger, but say I go over my vacation allowance. How do I know and make up for it?

  2. I love this advice and the multitude of options for setting up a budget. It can be very scary at first to look at the real numbers but once you have a handle on it and things begin to move in the right direction for goals, it can be really exciting.

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