Chances are good that at least one of your resolutions centers around improving your finances in 2023, like paying off debt or building an emergency fund. One of the best ways to do that is creating a budget.
The word “budget” can bring up images of spreadsheets and formulas that make you want to pull your hair out. But budgeting is just a way to ensure your money is working for you instead of the other way around.
How to create a budget
Meeting every dollar with a need of yours—whether buying groceries, paying down credit card debt or saving for your next vacation—can help you feel empowered and create momentum toward meeting your financial goals and ensuring your future looks bright.
1. Calculate your income
Start creating your budget by adding all the income sources you consistently have every month. Add up your take-home pay from each paycheck and include any additional income you may reliably receive from things like a side gig, freelance work, Social Security, alimony or investment income.
Your paycheck is probably consistent if you’re salaried and have a traditional W2 job, making budgeting much more straightforward. If you’re hourly or self-employed, you’ll likely need to take an average of your monthly income to help you budget with an irregular income. Make sure to err on the low side to help with any lean months.
If you have a side hustle, do freelance work or if taxes aren’t normally withheld from your paycheck, be sure to deduct federal and state taxes and other business expenses before using that income in your budget.
2. Track your spending
Once you know how much is coming in, it’s time to look at what’s going out. Start by tracking everything you spend for an entire month, whether you pay with cash or a debit or credit card, and include any monthly subscriptions or automatic withdrawals in your totals.
You may need to track your spending for longer than a month if you have significant differences in your monthly expenses or know that you’ll have some months with more expenses later in the year.
Add up all your fixed costs like rent or mortgage, utilities, cellphone, prescriptions, insurance, car or student loan payments, taxes, basic groceries and child care. This amount gives you an idea of the minimum you need each month without anything fancy.
Then, add up your more variable expenses, like credit card payments, gas, entertainment, eating out, subscription services or extras at the grocery store.
There are a variety of ways to keep track of what you spend. Use a notes app on your phone, old-fashioned pen and paper or review your bank and credit card statements each month, and put the charges into a spreadsheet for easy math.
Plenty of free or low-cost options are available to track your spending. Experiment until you find the best method for you and your family. The most important thing is to consistently track your expenses to have an accurate and honest view of your finances.
3. Develop a plan
Once you have a solid view of your monthly expenses, use a budgeting framework to help you make sure you’re making the most of your money.
The 50/30/20 plan is popular and simple to use. The idea is to spend 50% of your after-tax income on necessities, 30% on your wants and 20% on debt repayment and savings. With this method, every dollar has a job, and there isn’t anything left over.
The budget you create may look like this:
Needs: 50% of your after-tax income
- Rent or mortgage payment
- Car payment
- Child care
Wants: 30% of your after-tax income
Savings and Debt: 20% of your after-tax income
- Credit card payments
- Emergency fund
- Saving for your child’s education
4. Determine your priorities when creating a budget
It would be nice if our spending aligned with our budget and we had room for everything we wanted to accomplish. However, that is rarely the case, and you may have to adjust based on your priorities.
For example, perhaps you want to pay off debt and start an emergency fund simultaneously. Instead of doing one or the other, consider scaling back the amount you put into each goal until both fit into your budget. You’ll pay back your debt more slowly using this method, but you’ll also have built some savings to help cover emergencies and hopefully avoid adding to your debt balance.
You may be tempted to cut out your wants entirely and put any extra money toward debt payoff or savings. While that may work for a month or two, everyone needs a little room for fun in their lives.
You get to decide what’s essential in your life. You may decide that paying extra for organic food or a monthly massage is worth it, and you’re willing to reduce your spending elsewhere to accommodate it.
5. Review and adjust
After you’ve categorized your expenses, see if anything needs to change. If you’re using the 50/30/20 framework and the numbers aren’t lining up, adjust your spending to help them fit.
If you can’t get the numbers to work and need to reduce your costs, the “wants” section is likely the easiest place to start. Reviewing your subscription services, gym memberships or concert budgets can help you find room in your budget for necessities or help you better focus on priorities.
If further cuts are needed, look at your “needs” section. See if you can create space in your budget by negotiating a better rate with a utility or insurance company. Or see if something you consider a need is actually a want and can be reduced.
Don’t be afraid to keep adjusting until you find a strategy that works for you. Creating a budget takes trial and error.
6. Stay consistent
Block out time in your calendar and develop a routine of budget check-ins. It’ll help you stay on track and make needed changes. Remember that establishing your budget is only part of the battle. The real work is consistently reviewing and adjusting your system and recommitting to your goals, even when life gets in the way.
Bottom line of creating a budget
Budgeting can sound like a huge, intimidating project. It doesn’t have to be. Creating a budget can give you a better idea of where your money is going and how it can best serve your goals and future.
This article was published in November 2021 and has been updated. Photo by Dean Drobot/Shutterstock