[endif]-->[endif]--> Build and Maintain Your Best Budget | Payoff Life

Here’s a guide to creating a budget in just a few steps, plus tips for how to make sure you stick to it.

Pssst. Do you want to know the secret to creating your absolute best budget? Great. Here goes. Your best budget will be … (drumroll) … the one that you can stick to long term. And since no one knows your habits better than, well, you, this means you are the very best person to design your best budget.

So take it easy — you already have what it takes to knock this whole budget thing out of the ballpark. And we have lots of tips to help get you started and keep you on track. Ready? Let’s do this.

Step 1 — Just Breathe

First, take a moment to relax into your chair. Don’t look too far ahead and don’t think of this as something a chore. This is a learning experience, and the more you learn about what you spend, the more you’ll be able to make changes that can help you meet your savings goals. (Which will be awesome!) For now, let’s just focus on your numbers.

Step 2 — Crunch Your Number

When it comes to budgeting, build yours around your pay schedule to create your ideal budget period. This is important because your budget is dependent on how often you’re paid.

Once you know what budget period works best for you (whether it’s a calendar month or not), figure out your total household income for that timeframe. This is the total of all the money going into your bank accounts, including wages from your full-time job, part-time positions, contract or freelance work, residual income and child support.

  • On Special Months: If you’re paid every week or every other week, there will occasionally be a month in which you receive one more paycheck than usual. It’s smart to have a plan in place for when this occurs. Work it into your budget, use it to pay down debt, deposit it into savings — the choice is yours. But be aware of these special months throughout the year and decide in advance how you’ll handle the spike in monthly income.
  • On Irregular Income: If you’re a small-business owner, full-time freelance professional or a person who works on commission, your income may vary significantly from month to month. In that case, it may be helpful to prioritize all your expenses. (If you haven’t figured out yet exactly what your expenses are, don’t worry. We’ll talk about that a little more in a moment.)

(1) Try writing down or typing out all your expenses in order of importance. Expenses related to your food (groceries), home (mortgage, rent, utilities) and transportation (car payment, gasoline) should rank higher than payments for things like entertainment.
(2)  Do your best to predict what your total income for the month will be.
(3) Include, next to each expense, the actual dollar amount you expect to spend on that item.
(4) Keep going until you’ve subtracted every dollar from your income amount and no longer have any money to allocate. You’re telling every dollar where to go, beginning with the most crucial expenses.
(5) When you do get paid, begin spending your money on the list of expenses, starting with the top item and working your way down.

Step 3 — Establish Your Budget

There may be certain expenses you have every month that are always the same dollar amount. Examples include your mortgage or rent, your car payment, your cell phone bill and childcare. These are called fixed expenses.

Your budget will also include variable expenses, such as groceries, utilities like electricity, eating out, clothing purchases and so on. While some of these variable expenses are very necessary, what you spend on them may vary from one month to the next.

To determine what you should be spending on variable expenses, we recommend looking at your financial statements for the past 3 months. How much did you spend at the grocery store each month? How much did you spend on clothes? Then, consider whether what you spent in each area is appropriate.

If you’re struggling to decide how much income to dedicate to certain expenses, the following guidelines can give you a starting point:

  • 50% = Needs. These are expenses you absolutely have to pay, such as rent, utilities, groceries and transportation.
  • 30% = Wants. These are expenses you elect to pay — movie tickets, eating out, travel for leisure, etc.
  • 20% = Savings or paying down debt. These are funds toward future expenses, emergencies or debt.
On Zero-Based Budgeting

With a Zero-Based Budget, you have a plan for every single dollar. This is important because nothing kills a financial plan faster than not having one. So if you create your monthly budget and end up with $50 left over, you absolutely must tell that money where to go. Maybe you put the extra $50 into your savings. Maybe you add it to that month’s credit card payment. But if you don’t have a plan, you risk spending it without consideration versus putting it to a better use.

Step 4 — Maintain Your Budget

You just created your budget! But you’re not quite finished. It’s time to decide how you want to keep track of your spending. And don’t even think about skipping this step or putting it off for later. You just worked so hard to create your budget, now it’s time to put it into action.

There are countless ways you could keep track of your expenses. Write them down, plug them into a spreadsheet, use specialized computer software — it’s up to you. But choose a system that will be convenient and easy so that logging your expenses becomes a habit. Some people like recording their spending immediately after every purchase. Others prefer recording expenses at the end of every day, or at the end of every week. Remember, your best budget is the one you’ll stick to, so set yourself up for success.

Many people find a smartphone app to be useful because it’s always with them and requires only a couple quick taps. Here are a few of the most popular ones:

Step 5 — Be Adaptable

Keep in mind that while your budget might not be flexible, it is adjustable. So do your very best to live within the rules you set, but know that you’ll likely need to make adjustments here and there as you get a better sense of what you spend.

Also, remember that there’s no magical budget that works perfectly from month to month. Outside of your fixed expenses, each new month can bring curveballs like holidays, gifts, trips, illnesses, emergencies and repairs. Be sure to build a new budget every month and, when necessary, adapt by moving money around.

When an unplanned expense does come up, try to see if you can cover it by first pulling the money from another item in the budget. Try cutting 10% from one item at a time until you’ve found enough money to cover the expense. But if you manage to cut 10% from every single item and it’s still not enough, then go ahead and dip into your savings to cover the remaining amount.

Step 6 — Practice

Remember that your budget is, and always will be, a constant work in progress. Life is always changing, and so will your budget. Don’t get discouraged if you overestimate or underestimate items in the beginning. You are certain to get better at budgeting each month if you learn from your experiences, adapt when necessary and just keep going.

Happy budgeting!