How to Create and Use A Personal Budget
Do you find yourself wondering how to make a budget for your life? You’re not alone. It’s one of the most common questions that people ask when they start thinking about money and their financial future. Budgets are a great way to keep track of your spending and save money. A budget is also an effective tool for keeping you on track with your financial goals. But how do you create and use one? It’s easier than you think! Read this blog post for some tips that will help get you started.
How to Make a Budget
To create a budget that works, you need to get a firm handle on what you’re currently spending. What can your current income afford? How do your expenses and assets fit together? It’s important that you’re honest with yourself about what is realistic.
Collect your financial documents
The first step in creating a budget is gathering all of your financial statements.
- Credit card bills
- Paystubs
- Bank Statements
- Utility Bills
- Mortgage or Rent Statements
- Auto Loan Statements
You need to have all the information about your earnings and expenses. With detailed information on each expense, you can start budgeting by calculating a monthly average.
Determine your income
How much do you earn every month? The take-home pay amount should be used if you receive a regular paycheck with taxes deducted automatically. If you are self-employed or receive outside income, like child support or Social Security, make sure to include those as well.
Monthly expenses
You’ll need to know what you spend every month. Create a list of monthly expenses. This list could include:
- Groceries
- Utility bills
- Car payments
- Rent/mortgage
- Restaurants
- Credit card bills
- Savings
- Childcare
- Medical Bills
- Insurance
A good way to identify your spending is by looking back at the last three months of bank statements. If you save receipts use those as well to determine your expenses.
Calculate variable and fixed expenses
Fixed costs are payments of the same amount that you make each month, such as:
- Standard credit card payment
- Set savings amount
- Gym membership
- Netflix
- rent/mortgage
- phone bill
- car payment
- student loans
Monthly expenses that fluctuate are variable expenses, such as:
- Gas
- Restaurants
- Gifts
- Groceries
- Personal Care Items
- Vet Bills
- Travel
If you don’t have an emergency fund, include a category for unexpected costs that might happen during the month.
Use the first list made of your monthly expenses and break that into two lists, fixed expenses, and variable expenses. Once you have your two lists created start assigning a dollar amount to each line item. Begin with your fixed costs. Then, move on to your variable expenses and estimate how much you spend on each category. If you are not sure how much to assign to each category use your bank statements and saved receipts from the last few months.
Total Monthly Income and Expenses
Subtract all of your monthly expenses from your income. Your income is higher than your expenses if the number is positive. In other words, you are living within your means and have extra money. You can put the extra money into your retirement, savings, or debt. When your expenses exceed your income, the number is negative, and you need to adjust your spending.

Adjust Expenses
It is important for you to adjust your spending habits if your expenses are higher than your income. Start by reducing your variable expenses. Consider eliminating a category altogether if possible. You can limit your restaurant spending by eating out less. You can also choose not to go on vacation this year and your travel category will be removed from expenses entirely.
Online budgeting calculators can make the confusing process of creating a personal budget easy.
How to Use a Budget
Once you have your budget ready, what do you actually do with it?
Monitoring and tracking your expense in each category daily is the easiest way to stay on track with your budget. Find a system that works best for your lifestyle. Creating a spreadsheet or finding an app that you will commit to is your best bet. By tracking your expenses every day you’ll save yourself from overspending. It will also be easier to identify any problematic spending habits.
Review and Make Changes to Your Budget
Making sure that you’re on track financially might seem like a time-consuming chore, but it’s really not. Review your budget once or twice a year: have you received a promotion? How have your expenses changed recently? Have you paid off any debts? How much extra money do you have? Try to use the extra funds to pay off debt, put money into investments, or save for retirement.
Related: Catch Up on Your Retirement Savings
Don’t let your budget dictate how you live, but rather let it work for you.
If you are starting a budget from scratch or need to create one for the first time, it is important that you layout your expenses and income. The key things to keep in mind when creating a budget are calculating variable vs fixed costs and figuring out what income versus expense ratio works best for you. Once this data has been collected, divide monthly expenses by total monthly income and subtract any debt payments (fixed) to arrive at an estimate of how much money can be saved each month without taking on more debt through credit cards or loans. This is called discretionary spending which should equal about 33% of your take-home pay if not higher – but never lower than 30%. By using these formulas as guidelines, there will always be enough funds available.
That’s it! Now you’ve budgeted your life and can get started saving money.
Know that you are not alone if you are struggling with debt. Debt is a huge burden that everyone in America struggles with. This budgeting guide can help and show you how to budget your money responsibly.
Financial hardship is something that we at LoanStream understand.
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