Four Simple Steps for Budgeting

Published: February 22, 2019

Making smart budgeting decisions today can change your financial future. Whether your goal is to pay off an auto loan early or save for a rainy day, it all starts with a budget. A budget is just as much about spending money as it is about saving money. Having a plan for your finances can also help improve relationships where money is a hot topic and reduce anxiety about unexpected expenses that pop up at the worst possible time.

Here’s how to create a budget in four simple steps.

Step 1: Figure Your Household Income from All Sources

Total the take-home pay for all members of your household. Add non-employer income which might include:

  • Alimony payments
  • Child support payments
  • Small business income (or side jobs)
  • Social Security income

Step 2: Identify Expenses

Some expenses change each month while others stay the same. For example, your rent or mortgage payment remains the same while your grocery expense is likely to fluctuate. Figure your total expenses by gathering receipts, account statements, utility bills, and any other document that can show where money went in the last 30 days. If you’re unable to obtain records that far back, use the information you have. You can update your monthly budget later.

Step 3: Decide on Your Financial Goals

Subtract expenses from your income. What did you find? Are your expenses more than your income? Or, do you have more money than you thought at the end of each month? The answer to these questions will help determine your first financial goal.

Paying off debt and saving for retirement might be the first thing you think about when you hear the term “financial goals.” Debt reduction and retirement planning should indeed be part of your overall plan to improve your finances. But, if you don’t have funds already set aside for an emergency, it is recommended that you make regular deposits to a savings account for a rainy day fund. A deposit of $50 a month can build to $600 in one year.

Step 4: Take Action

Now that you have a financial goal based on your income and expenses, it’s time to take action. Whether your goal involves debt reduction or saving money, trim non-essential expenses and redirect those funds to pay off debt or to a savings account.

Common non-essential expenses:

  • Switch to a less expensive cell phone plan
  • Cancel cable service and watch your favorite shows online
  • Eat at home more often instead of buying fast food
  • Quit smoking
  • Opt for free local entertainment (ex. A car show instead of the movies)

What non-essential expenses appear on your monthly budget? Reach your financial goals by reducing or eliminating as many as you can.

What Do You Do After You’ve Taken Action on Your Budget?

Congratulations on implementing your budget. The next step is maintenance. It’s unlikely that your budget will look the same in five years. It might even change over the next year due to an increase in income, household size or new expense like a home. Make budget adjustments to align with these changes. Whatever may come, you’ll be prepared with your budget in hand and the confidence of knowing that the financial future of your dreams is within reach.

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