1. Know your take-home pay.
The first step to creating a budget is knowing how much money you have available. Be sure to build your budget around your take-home pay (the amount of money in your pocket after deductions for things like taxes, retirement contributions, or health insurance).
2. Choose a timeframe for your budget.
The most common types of personal budgets are weekly, bi-weekly, or monthly. Choose the option that is right for you based on how frequently you receive a paycheck.
3. Identify non-negotiable expenses
Once you know the timeframe for your budget and the total amount of money you have to work with, it’s time to outline costs. Always account for non-negotiable expenses first. Non-negotiable, recurring expenses might include:
Rent or mortgage payment
Utilities and other fees (such as electricity, water, waste removal, home insurance, cell phone bill, etc.)
Transportation (car payment, car insurance, gas, bus pass, etc.)
Personal care items (such as clothing or toiletries)
There are many long-term costs that you should also prioritize in order to ensure your stable financial future. Be sure to regularly set aside money in your budget for things like:
Retirement savings (if your employer does not already deduct this from your paycheck)
4. Identify discretionary purchases
After you’ve set aside enough money for the necessities in life, you can allocate any leftover money for the optional expenses you enjoy, such as eating out or going on vacation.
5. Remain diligent about tracking expenses
A budget only works if you stick to it. It can be easy to overlook a few expenses, but failing to track even small expenses over time will make your budget inaccurate. Consider using a spreadsheet or budgeting software to create and manage your budget.
6. Adjust your budget as needed
You may overestimate or underestimate the amount of money you typically spend on any budget category. Use your best estimation of expenses when you create your budget the first time. After tracking your spending patterns for a few weeks, you might find that you can cut back on one category and reallocate that money to different expenses.