How to create a budget in 5 easy steps

Does your income exceed your expenses? It’s important to know for sure.

How To Make A Budget

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Most people know they need a household budget. But actually creating one — and then sticking with it — can be difficult. It’s easy to let an unexpected expense or the desire to go on a trip make a hole in your budget if you’re not prepared. There are, however, a few basic elements to budgeting that can help you stay the course while still enjoying your life. Here’s a step-by-step guide:

Step 1: Organize

At its core, a budget tracks two things — your income and your expenses. Start by gathering your financial documents, such as pay stubs, credit card and bank account statements, and auto or student loan bills, to ensure you have enough information to begin tracking the money coming in and going out.

Step 2: Track

For one month, keep a detailed log of all your spending habits. Track all your expenses, from regular monthly items, such as car, rent, mortgage, or credit card payments down to the small variable pieces, such as the amount you spend on daily lunches. Consider using online tools, such as Budget Watch, to automate the process of tracking your spending and setting up budget goals. If you’ve been paying your bills and direct-depositing your paychecks all within the same account, you can use your account history online to help you see regular patterns or estimate what you spend every month on items that can vary, like electricity.

Step 3: Analyze

At the end of the month, subtract your total expenses from your total income. If your expenses add up to less than your income, you’re on the right track. If not, examine your spending with two questions in mind: “What can I do without?” and “What’s really important?”

Step 4: React

After looking at all your expenses, separate them into categories and set a budget for each. If you think you spend too much in a given area, set a goal that will require you to actively cut back. To prepare for the future, make sure you have at least one category for saving — if you don’t have an emergency fund, work on creating that with your savings so that you don’t break your budget if your car requires an expensive repair or you encounter a health care need. You could also create categories for vacations or other special occasions so that you feel more confident taking a trip, knowing it won’t derail your budget plans.

Step 5: Review

Make a habit of reviewing your budget every month. You may also benefit from a qualified second opinion. That could come from a trusted friend or relative who’s skillful with spending and saving. It could also come from an experienced financial planning professional who can review your budget, offer suggestions, and help answer questions.

There will be emergencies and events that may divert you off your target every once in a while. But if you make budgeting a lifetime habit, and always try to set aside some money to save, you’ll be better positioned to react to those unexpected expenses and keep on your financial path.

Learn More: Planning for Additional Homeownership Expenses

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It’s important to remember that the costs of homeownership go beyond the monthly mortgage payments. It helps to plan for home upkeep expenses early on in the buying process. Depending on what kind of home you buy, the expenses you encounter may vary quite a bit.

To maintain the home itself, you’ll have a number of expenses to factor in. Depending on the type of exterior, your home may need painting, siding repair or masonry work.

You’ll need to look after the foundation too. Houses shift and settle after construction. Both old and new houses can have cracks.

For the roof, finding and correcting minor deterioration in its early stages can often prevent problems later on.

And don’t forget that drafty windows result in higher energy bills.

If you have a yard to care for, you’ll probably want to buy items to enhance and maintain the landscaping, such as plants and mulch, as well as lawnmowers and other tools.

Inside, you’ll want to check your furnace and air conditioner seasonally for proper functioning, and keep your kitchen appliances in good working order.

When it comes to utility bills, bear in mind that water, electricity, and gas costs will vary depending on where you live, the size of your home, and the season.

Other expenses include home furnishings, such as new furniture, beds, lamps, and window coverings.

Also, some neighborhood developments require homeowner association dues to help pay for common areas.

Finally, there’s a home insurance deductible to consider. Unexpected damages covered under your homeowner’s insurance often require an out-of-pocket expense.

So the bottom line is, remember to consider all the expenses you’re likely to incur when you estimate the total monthly cost of homeownership. The principal, interest, taxes, and insurance, as well as the home upkeep costs, are realistic expenses to take into account.