How to create a budget

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Make sure you put together your financial statement

Before you begin, gather up all your financial statements, including:

  • Bank statements
  • Investment accounts
  • Credit card bills
  • Receipts from the last three months
  • Mortgage or auto loan statements

You want to have access to any information about your income and expenses. One of the keys to the budget-making process is to create a monthly average. The more information you can dig up, the better.

2. Calculate Your Income

How much income can you expect each month? If your income is in the form of a regular paycheck where taxes are automatically deducted, then using the net income (or take-home pay) amount is fine. If you are self-employed or have outside sources of income, such as child support or Social Security, include these as well. Record this total income as a monthly amount.

If you have a (for example, from a seasonal or freelance job), consider using the income from your lowest-earning month in the past year as your baseline income when you set up your budget.

3. Draft a list of monthly expenses

Write down a list of all the expenses you expect to have during a month. This list could include:

  • Insurance
  • Groceries
  • Utilities
  • Entertainment
  • Personal care
  • Eating out
  • Childcare
  • Transportation costs
  • Travel
  • Student loans
  • Savings

Use your bank statements, receipts, and credit card statements from the last three months to identify all your spending.

4. Determine Fixed and Variable Expenses

Fixed expenses are those mandatory expenses that you pay the same amount for each time.2 Include items like mortgage or rent payments, car payments, set-fee internet service, trash pickup, and regular childcare. If you pay a standard credit card payment, include that amount and any other essential spending that tends to stay the same from month to month.

If you plan to save a fixed amount or pay off a certain amount of debt each month, also include savings and debt repayment

  • Groceries
  • Gasoline
  • Entertainment
  • Eating out
  • Gifts3

If you don’t have an emergency fund, include a category for “surprise expenses” that might pop up over the month and derail your budget.

Start assigning a spending value to each category, beginning with your fixed expenses. Then, estimate how much you’ll need to spend per month on variable expenses.

If you’re not sure how much you spend in each category, review your last two or three months of credit card or bank transactions to make a rough estimate.

5. Total Your Monthly Income and Expenses

If your income is higher than your expenses, you are off to a good start. This extra money means you can put funds towards areas of your budget, such as retirement savings or paying off debt.

If you have more income than expenses, consider adopting the “50-30-20” budgeting philosophy. In “needs,” or essential expenses, should represent half of your budget, wants should make up another 30%, and savings and debt repayment should make up the final 20% of your budget.

If your expenses are more than your income, that means you are overspending and need to make some changes.

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