It's time to learn how to make a budget. Even for the type As among us, budgeting comes naturally to few. It may not be your idea of fun, but it’s also one of the most valuable skills any young person will learn.
If nobody taught you this lesson and you struggle with saving money, paying debts, and managing your finances, that ends today. We've put together a complete guide on how to create a budget—including a free downloadable budget spreadsheet and recommendations for budgeting apps.
Why budgets are important
Budgets are an essential tool that will help you manage your expenses and save for the future. Without a clear view of where your money is going, you could quickly find yourself knee-deep in debt.
Even if you aren’t in debt, you may run into a problem that’s harder to spot: not having enough money set aside for a rainy day—which can come in the form of a serious bike accident with a pile of medical bills or suddenly being laid off. (Speaking of it, here's how to survive a layoff financially.)
It doesn't stop there; having a budget is important beyond just during a crisis. It empowers you to control your money by knowing exactly where it's going, and it can help you reach your financial goals by encouraging smarter spending habits.
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How to make a budget in 7 steps
Budgeting doesn’t have to mean cutting back. It just means actually knowing where your money is going. You may be surprised to find that you spend over 5% of your salary at Starbucks, or that you only save $15 a month when you thought you were saving closer to $100.
As the old adage says, knowledge is power. Seeing what you spend your money on often makes you reconsider whether that’s in line with where you really want your money to go. you'll find a step-by-step guide on how to make a monthly budget:
1. Calculate your after-tax income
Start by calculating your after-tax income, which includes your salary and any other regular income streams you might have. If you're self-employed, a contractor, or a freelancer with irregular earnings, base your calculations on your lowest payment.
That's crucial because your income forms the foundation of your budget. Relying on your total net income or highest paycheck can lead to overspending and an unrealistic budget plan.
2. Track your monthly expenses
The next step is to track your monthly expenses. Begin with fixed expenses like rent, mortgage, car insurance, and utilities. Then, move to variable expenses—those that fluctuate from month to month, such as shopping, entertainment, personal care, and groceries. If you have a hard time remembering the costs of these expenses, check your bank account statements from the previous month.
3. Assess your financial situation
Now that you have the two most important pieces of information to create a budget—how much money you make and how much you spend to maintain your lifestyle—it's time to deduct your monthly expenses from your monthly income.
This simple calculation will paint a clear picture of your financial situation. Do you have any money left after paying bills, or is your salary fully compromised? Are your variable expenses eating into a significant portion of your income? The answer to these questions will guide you in creating a budget plan.
4. Set a realistic budgeting goal
This will help you improve or adjust your spending habits, reduce expenses, and allocate the remaining money toward short-term or long-term goals. (Short-term goals could be things like credit card debt repayment, while long-term goals might include buying a house and retiring, which could take several years or even decades.)
Having clear, attainable goals can motivate you to stick to your budget because you know there's a reward at the end. Don't be afraid to adjust your objectives down the line—financial goals are not set in stone, you can always make changes if necessary.
5. Choose a budgeting method
The 50/30/20 rule is one of the most popular budgeting methods, highly recommended by finance experts. It means dividing your income into three categories: needs, wants, and savings.
Fifty percent of your income goes for needs (rent, mortgage, transportation, utilities, and groceries), 30% for wants (entertainment, shopping, going out), and 20% for savings (emergency fund, retirement, education).
Other popular budgeting methods include envelope budgeting and zero-sum budgeting. In both approaches, every penny of your income is destined to a specific purpose. The goal is to use only that designated amount for each expense category. At the end of the mount, any remaining money is saved.
Neither method is necessarily better than the other; they're simply different, and you should choose one that will work best for you. Picking a method that you struggle to follow can lead to frustration and, eventually, cause you to give up on budgeting altogether.
5. Adjust your spending habits
To stay on budget and achieve your goals, it's likely that you'll have to adjust your spending habits. Non-essential and variable expenses, like salon visits, eating out weekly, and multiple streaming services, are the easiest to cut back on. But that doesn't mean you can't have fun—just live within your means and avoid spending crazy amounts of money on unnecessary things.
6. Consider opening a savings account
Saving money is easier when the amount you intend to save isn't in your checking account. Consider opening a savings account, preferably one that earns interest. Also, don't wait until the end of the month to save—as soon as you receive your salary, transfer your planned savings amount for the month. (Here's how much you should save per paycheck.)
7. Review your budget periodically
Don’t forget about your budget once you make it: budgets are living documents. Record your expenses, set goals, and go back to see how you are doing. You can make adjustments, too—either in the budget (to make it more realistic), or in your spending (to stay in line with your goals).
How to make a budget spreadsheet
Begin by creating categories for income, fixed expenses, and variable expenses. Income can include salary and alternative sources of income. For expenses, start with housing costs, which cover rent, mortgage, and home insurance.
Next, move to transportation (car maintenance, insurance, parking, public transportation), food and beverage, shopping, healthcare, debt repayment, retirement savings, and leisure activities (i.e. entertainment, hobbies, personal care).
List each category on a spreadsheet row to have a clear vision of costs and identify areas where you can reduce spending. Use sum and subtraction formulas to automate calculations and make everything easier for you.
If you're not tech savvy, we’ve put together a quick and easy-to-use The Muse Budget Tool. Here's what our spreadsheet offers:
- Step-by-step instructions for you to enter your yearly savings goal and a monthly estimate of what you spend
- A clear picture of how your spending splits across categories (e.g., housing, food, transportation)
- Comparison of your spending with our recommended budget, so that you can see where you over- or under-spend
Click here to get started. Then, choose File > Make a Copy, and edit your version of the document as you please. If you prefer using Microsoft Excel instead of Google Spreadsheet, download the file and open it in Excel, or copy and paste the categories and formulas into Excel.
If you prefer neither option, consider using a budgeting app. They are typically more intuitive, offering pre-set configurations while still leaving room for some customization. Popular options include YNAB (You Need A Budget), Goodbudget, and Mint.
The most important thing is: get started! Once you’re comfortable with making a budget, you can think about changing categories to reflect your spending habits or trying different ways of tracking your expenses.
Amanda Cardoso contributed to the latest version of this article.