How to make a budget + template | Budgeting | Roost
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How to budget

8 simple steps for making a budget work

If you’re looking to adjust your financial situation or plan to move into a new (or first-time) rental agreement soon, you’ll want to start this process by looking into your finances and coming up with a personalized budget for yourself. This includes deciding why you want to budget in the first place, determining your total income, figuring out what your goals are, and deciding how to achieve them.

If that sounds scary, don’t worry! We’ve established eight simple steps to help you get your budget in order and your finances under control so you can achieve your financial goals. When you’re finished with this article you’ll be ready to get your budget started and begin reaching your financial goals. Let’s get started!

1. Why do you want to budget?

The first step to creating a personalized budget for yourself is making sure that you understand why you want to budget in the first place. Most people actually don’t budget, and try to keep track of their expenses in their head — we’re all guilty of this at some point! 

This usually doesn’t work for long, as expenses add up and we would rather forget. Out of sight out of mind. This is why we decide to budget! Setting up a budget is really the only way to effectively know where your money is coming from and where it’s going.

Psychology is one of the biggest factors when it comes to your finances, so knowing the underlying reasons behind why you want to budget in the first place is a great way to start and stay motivated. Some of the most common reasons for creating a budget include to:

  • Know where your money is going
  • Create an emergency savings fund
  • Stop living paycheck to paycheck
  • Payoff student loans or credit card debt
  • Plan a dream vacation
  • Buy a new car or house
  • Invest and save towards retirement

As you can see, there are countless reasons to create a budget in the first place. No matter what your own personal reason is, budgeting will help you achieve your financial goals, and it’s a pretty simple process!

2. Figure out your total income 

If you’ve decided to sit down and make a budget, great! You’re already ahead of the curve. When planning a budget for any reason, from building a savings account, to determining how to best afford your rental payment, to planning the vacation of a lifetime, the first thing you want to do is calculate your total monthly income. 

Your total income is not just the money you bring home from your regular job. The total income you bring in is composed of anything and everything you receive and/or do that adds money to your pocket.

For the purposes of calculating your income for making a budget, example sources of income other than your regular salary may include:

  • Income from freelance work or “side” work
  • Cash gifts
  • Earnings from garage sales or online sales
  • Child support and alimony payments
  • Social security, disability, SNAP, TANF, and other government payments
  • Dividend and interest payments on investment

3. Calculate your total expenses

After you have a grasp on your total income, it’s time to take a look at your monthly expenditures, i.e. how much you spend in an average month. The best way to do this is to look through your bank statements, credit card statements, budgeting apps, and any other financial information you have about what you spend.

One thing to keep in mind while calculating your average expenses is that the amount you spend will likely differ month to month — especially before you have a budget made! 

Because of this, you’ll want to add up the total amount you’ve spent over the last 6-12 months and divide it by the number of months. This will give you a more accurate picture of how much you’re spending in an average month.

Lastly, a good rule of thumb is to add an additional 10-15% onto your monthly expenses for unexpected bills, such as your car breaking down or some sort of medical emergency. Adding these extra costs to your expenses will make it easier to budget for if and when they do come up!

4. Set your savings goal

In addition to your monthly expenses that you’ve calculated, you owe yourself a little extra cash for the future.

  1. Emergency savings fund — start out with a goal of $200 and work your way up to three months of expenses.  A car-related expense is the most common type of emergency, but medical expenses, taxes, or job loss can also catch you by surprise. 
  2. 401k — If your employer offers a 401(k) contribution match, you should try to deposit at least the minimum percentage needed in order to get their match. That’s 100% return on your investment, so it’s basically free money!

If after you’ve completed the first two steps you realize that you are spending more than you’re making, it’s time to sit down and determine where you can cut back. You’ll need to be making more than you’re spending in order to start having money to save! Or, pick up a temporary side-job to at least get your emergency savings plan started. 

Go back and look through your expenses, see how many unnecessary ones you can cut out. You’ll be surprised at how smaller charges can really add up over a month! Some of the most common expenses people can cut down on include:

  • Daily latte 
  • Going out for lunch  
  • Eating dinner out when you don’t feel like cooking
  • Excess or impulse shopping

Instead of spending money on all this stuff, try making coffee at home and packing your thermos and lunch for the day.  Set a realistic amount you can afford to spend on eating out each month and make dinner at home the other nights. Throw a dinner party and invite friends over — with each person to bring a dish or drink.  

You probably don’t need the latest and greatest versions of everything. Try to stop yourself from shopping as much and buying extra things if you don’t have enough money to save. As much as we all love going on an Amazon shopping spree, your future self will thank you for setting that money aside instead!

5. Determine your financial goals

This goes back to the first step of why you want to budget in the first place, but really layout your financial goals here. When creating goals you want to be both specific and realistic. Don’t expect your budget to suddenly make you a millionaire overnight, driving a Ferrari to your new mansion in the hills.

Have realistic goals for yourself that are specific to you and your own financial situation. If you want to buy that Ferrari, great! Lay out a plan for how you can get there. If your goal is to pay off debt and start investing for retirement, awesome! Setting up a budget will help you have more money every month to put towards that dent and later for you to invest. 

Being realistic with your goals and making them specific to your own life and financial situation will help you achieve what you want. Everyone is in a different situation with different incomes, different expenses, and different dreams. You want to be sure to budget to achieve what you really want, not what everyone else does!

6. Decide on the type of budget you want to make

There are all sorts of different types of budgets out there. Each one is the best option for different people in their own financial situations, so be sure to choose the one that fits your situation.

One of the most popular budget types is known as a zero-based budget or zero-sum budget. Under this budgeting structure, the goal is to have a zero-sum between your income and expenses. What this means is that every dollar that comes in is assigned somewhere to go.

This doesn’t mean that you are spending every dollar that comes in, just that every dollar is assigned somewhere. This type of budget allows you to set aside specific amounts of money for various monthly expenditures. Some of the most common areas to set aside money for include:

  • Rent/mortgage payment
  • Utilities
  • Car note
  • Insurance
  • Food and groceries
  • Savings/investments
  • Entertainment (eating out, going to the movies, etc)

This list doesn’t include everything, since that is dependent on your own situation, but it should give you a good idea on where to start. By allocating your income into specific areas, you will be able to keep track of exactly how much you’re spending and make sure you don’t start spending more than you make. It’ll also let you see if you are spending more in one area than you’d really like to be.

If you allow yourself $250/month for entertainment, for example, and the first week of the month you go out to eat a few times and go see a movie, you may find yourself with only $100 to go for the rest of the month. This will cause you to take a step back and realize how much excess you’re spending on extraneous activities.

This will also help you to reorganize your budget as you go. Don’t expect to get the budgeting perfect the first month! You may spend more in one area and spend less in another. Make your budget a living document that you can change and update as you please.

7. Choose a budgeting tool and create your budget

After you’ve done everything above, it’s finally time to sit down and actually create your budget! In today’s world with technology all around, there are seemingly apps for everything. Luckily for us, budgeting is no different! There are numerous apps out there that will make budgeting easier for you, and we’ll go over a few of these here. For more details, check out our Best budgeting apps article to determine the best app for you! If you’d prefer to go a bit more old-school, using a spreadsheet to create your own budget is also an incredibly effective way to track your income and expenses.

Use a budgeting app

  • Mint: A free service available online as well as through iOS and Android devices, Mint offers its users lots of different financial services, including of course making a budget. By linking your debit and credit cards, Mint is able to keep track of both your income and spending in one place, making it easy to see exactly where all your money is going.
  • Personal Capital: Similar to Mint, Personal Capital allows you to link your debit and credit cards, bank accounts, and investment accounts all together to give you an overall view of your financial situations. By tracking all your spending, Personal Capital will help show you exactly where you are spending your money and how much you are spending.
  • You Need a Budget (YNAB): One of the most popular budgeting tools, YNAB is a paid service that allows you to keep track of your spending, specify spending categories and limits, and helps you keep track of your savings goals. With a 34-day free trial, you can try YNAB for free and see how you like it.

Use a simple spreadsheet

If you don’t want to go the route of using an app for budgeting or think that may be overkill, you can always go back to the basics. One of the most basic and reliable ways to create a budget is to make a simple spreadsheet and stick to it. Using a spreadsheet for budgeting offers a quick, personalized way for you to track your income and expenses the way that you want to and how you think is best for your own lifestyle.

The general basics for creating a budget using a spreadsheet make it a fairly simple process regardless of which spreadsheet processor you use (Microsoft Excel, Google Sheets, etc.). The five basic steps to creating a budget with a spreadsheet are as follows:

  1. Just like within the apps, you’ll want to create defined categories for your income and your expenses. To be more specific and track everything, you can add subcategories, but you’ll definitely want to track your total income and expenses.
  1. Choose what period of time you want to budget for. The most common timeframe that people use is monthly, since most recurring bills are monthly. Some people do weekly or based on pay periods as well do what makes the most sense for you.
  1. Use formulas to automatically calculate values for you. Both Excel and Sheets have built-in capabilities to use simple formulas to automatically calculate values for you such as differences between what is budgeted and what is actually brought in or spent.
  1. Start filling in the values of your budget. You want to put in how much you make (or plan to make), as well as how much you plan on spending on various categories. You’ll want to budget for all the main things such as rent, utilities, insurance, car payments, food, entertainment, and whatever else you plan on spending money on.
  1. Lastly, you’ll need to consistently (and truthfully) update your budget. If you spend $100 on dinner one night, be sure to add that $100 to your food spending. If you don’t update the budget and keep track of how well you’re following it, the budget won’t be of any use to you.

Simple monthly budget

Below is a simple example of how a simple spreadsheet might be used to create a budget. For this example, it is looking at a month’s worth of income/expenses, reviewing how the previous month went. This means the numbers seen here are how well the budget actually was followed.

This example shows a simple budget tracking one month’s worth of financial transactions. To explain a few points here:

BudgetedActualDifference
Income (net)
Salary$3,000$3,000
Side hustle$500$350-$150
Total income$3,500$3,350
Expenses
Rent$1,250$1,250
Utilities/WiFi$150$145$5
Car payment$250$250
Car insurance$200$200
Health insurance$110$110
Rent insurance$16$16
Food$300$425-$125
Entertainment$200$225-$25
Cell phone$40$40
Shopping$250$250
Savings$100$100
401K$100$100
Misc.$25$50
Total expenses$2,991$3,161-$170
  • Your salary is typically known here, let’s say it’s $3,000 bring-home per month (after taxes). And, let’s say you expected (budgeted) to make $500 from a side hustle, but instead, you only made $350 — it happens. (psst. Don’t forget to set aside a bit for taxes too if it’s an ongoing contract job).
  • A lot of expenses are typically known month-to-month. For example, rent, car payments, and insurance payments typically don’t change without you knowing.
  • Food, entertainment, and shopping often catch you by surprise — it’s very easy to overspend in these categories.  No problem here as there is room in the budget to go over and not use a credit card. 
  • Unless you track every single transaction, there will always be a few bucks here and there unaccounted for. Add a miscellaneous budget line item for this and if you exceed it every month, consider breaking it out into its expense category to track.  

8. Keep track of your progress

So you’ve done the hardest parts. You’ve decided you need to budget and you have your budget started, well done! The most important thing to do moving forwards is to track your progress and review your budget commonly.

You don’t want all that work you did starting your budget to go to waste, so be sure to review it at least at the end of the month (if not more common than that). This will help you look back and see if you stuck to the budget, see how you need to adjust your spending habits, and alter it as you desire to achieve different goals.

Budgeting will help you achieve your financial goals

Looking at your progress and seeing how well you’re doing will also make you more excited about your finances. As you see your debt getting paid down, or your savings account growing, or that fund you’re setting aside for that Ferrari growing and growing, you’ll be happy about it and it will make you want to do even better the next month! Happy budgeting!

Although budgeting may seem daunting at first, it’s a simple process when it’s broken down into its individual steps. By following the eight steps we’ve gone over in this article, you’ll be ready to start your budget and get your financial situation in the best place it has ever been.

A quick note! Our goal is to gather and share info that’s up-to-date and helps you make great decisions as a renter. That said, the information you get directly from a provider could be a little different. Make sure to review their terms and conditions directly; and, if you see anything here that needs to be updated, please let us know! Advertising disclosure
Last Updated: October 26th, 2020