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How to Create a Personal Budget

A budget is an essential tool for managing your finances. When you plan where your money will go each month, you avoid a lot of unnecessary stress. Setting up a budget that works for you is pretty simple, too. Follow these steps, and you will have a personalized budget in minutes! 


Determine Your Income.

The first step in creating a personalized budget is to figure out how much money you will have coming in every month. This could include income from your job, investments, rental property, or other sources. When calculating income from your job, remember to use the amount you receive after taxes are taken out. 


Determine Your Necessary Expenses.

Now that you know how much money you have flowing in, you will need to determine what money will be flowing out. Before we worry about discretionary spending — a term that describes spending on optional items, like a new TV —, let’s focus on your hard expenses: those that you can’t get around. These will include rent, car payments and insurance, cell phone bills, and any other necessary monthly recurring charges. Make a list of each expense and add them up to see the total amount. 


Choose a budgeting method.

One of the most popular methods is the 50/30/20 rule. Using this method, you should plan to spend about 50% of your income on necessities, allow around 30% for discretionary spending, and set aside around 20% for savings or paying off debts. Using the number from step number two, check to see what percentage of your monthly income will be spent on necessary expenses. If that figure is higher than 50%, it may be time to examine your expenses. For instance, it’s a good rule of thumb to spend no more than 30% of your income on rent. Next, If you’d like to get even more detailed, you can identify categories within your discretionary spending, such as restaurants, clothing, and entertainment, and set limits for each. As for savings, many people find it easiest to set up an automatic deposit from their checking to savings accounts close to the date of each paycheck. This way, you won’t fall into the trap of accidentally spending it. Of course, this is just one budgeting method. You could decide, for instance, that you’d prefer to save more of your income. As long as you budget enough for your necessary expenses, the rest is up to you. 


Track Your Progress.

Budgets only work if you actually use them! There are many ways to track your spending and ensure you are sticking to your personalized budget, such as keeping a spreadsheet of all your purchases. This can be a bit time-consuming, however. Luckily, there are many apps and online tools that can do this for you, such as Mint, which connects directly to your bank account and can even warn you when you’re getting close to reaching the limit of a spending category.  Whatever you use, make sure you are consistent in your tracking. 


Make Adjustments As Needed.

It’s a good idea to assess your budget after the first month or two. Is it working for you? Are you able to live comfortably within the limits you have set for yourself? If not, make adjustments to the categories until you find the right fit. Of course, as time goes on and your income or expenses change, be sure to adjust your budget accordingly.