How to make a budget plan is one of the most important skills a person can learn. Navigating through life without a spending plan can be disastrous, leading many to feel like money and the life they want is out of their control. When you create a budget plan, you take control of your money, work efforts and your future.
“You must gain control over your money or the lack of it will forever control you.” –Dave Ramsey
Incredibly, this all too important skill of making budget plans is not part of our education in school, leading many to get off to a bad start with money, debt, and credit. And once you fall down the path of crushing debt and a negative credit score it’s hard to get out of it.
Learning how to make a budget plan right away gets your financial life started on the right foot.
This article shares the basics on how to make a budget plan for first timers. The steps are simple and can lead to financial success regardless of how much money you make!
“Try to save something while your salary is small; it’s impossible to save after you begin to earn more.” –Jack Benny
Making more money does not mean you do not need a budget; everyone needs a budget plan. In fact, the individuals that often find themselves in most trouble financially make a great income, but find themselves spending as much (if not more) than they continue making. Follow these steps through your career to keep spending under control, plan and save for life events and grow your personal wealth as you grow your income.
“It takes as much energy to wish as it does to plan.” –Eleanor Roosevelt
How to make a budget plan tip 1: Change your mindset about the word budget.
The word budget is as unpopular with people as the word downsizing and diet. While the majority of people recognize that all three are necessary, they hate the thought of the words. Ask most people what comes to mind when the word budget is brought up and they think about coupon clipping, being cheap and ungenerous, instant ramen or spaghetti meals every night and bologna sandwiches for lunch.
A budget is not an excuse to deny yourself a good life. Most budget plans have a place for the items you find most important for living a meaningful life. It can be a vacation category, or fashion, dinners out, a nice car or charitable causes. The point is that a budget will help you prioritize what items are worth your money and what items are not.
Making a good, realistic budget plan and sticking to it can be one of the most empowering and rewarding things we can do in our lives. When we create a budget, we focus our attention and efforts into paying off debt, saving for a car or our dream home, building our credit history, and funding our retirement plans.
There are few things you can control in your life, your finances are something you can take charge of!
Sticking to a budget help us live more meaningful, less stressful, and fuller lives. The guesswork is gone and there’s no need to worry in the middle of the night about how we will make ends meet. A budget plan helps us know how much money we are really making, where that money is going, where it should go, and the opportunity to dream and adjust our plans when we have a welcome budget surplus.
So get out of the mindset that a budget is a negative thing. Once you do, you can enjoy making and living with a budget plan.
How to make a budget plan tip 2: Figure out how much money you make.
This may sound obvious, but do you really know how much comes in every week or every month, after taxes and deductions? You’d be surprised at how many people have no idea what their exact take-home pay is. Without this number, a budget can’t work. The first step to building a budget that works is to understand exactly how much money is coming in each month.
If you work as a freelancer or independent contractor, it’s harder to get an exact number. Try to work with monthly numbers for the last year or two. And to be extra safe, consider using the minimum amount you bring in each month. That way you are planning using worst case scenario numbers. If you can balance a budget on your minimum monthly income, the surplus of cash when you have a better than average month is like a Christmas present.
How to make a budget plan tip 3: Break down how you are spending your money.
Your expenses come in two types: fixed or variable. Fixed expenses are the expenses that are normally the same or vary just slightly from month to month. Some good examples of fixed expenses include rent, utilities, car payments, student loans, health insurance, etc. Fixed expenses are usually predictable and expected every month. They are often out of your control. You may be able to reduce these fixed expenses to save money, but not cut them out of your budget plan entirely.
As the name suggests, variable expenses vary. These types of expenses are not steady from month to month. Some examples of variable expenses are entertainment, clothing, and travel. This is the spending category where you can save money by cutting the expenses or reducing them if you find that your monthly expenses are more than your monthly income.
If you tend to pay cash for everything and you’re not sure exactly how you’re spending your money, take a month before setting your budget plan to track your expenses. Use this month to note where every penny is spent by writing it in a notebook or save your receipts to tally.
How to make a budget plan tip 4: It’s time to balance income and expenses.
Now that you know how much money is coming and going, it’s time to balance the budget. A helpful way to do this involves using index cards to write each expense and its amount to arrange on one side and what money comes in on the opposite side. Try playing with the numbers by taking out any expenses you could eliminate or at least cut down to an achievable amount until you find that you are not spending more than you’re making.
If playing around and shuffling your expense numbers doesn’t resolve your budget shortfall, it might be time to take a critical look at each expense and how it can be reduced. Maybe it’s time to get a cheaper apartment or a roommate to share in your rent and monthly utilities. Do you really need cable TV? Can your cell phone plan be scaled back?
Making your income and expenses sections balance out is the hardest part of making the budget plan, but it’s where the magic lies. Once you figure out a way to make the money numbers work in harmony together, you’ll have a roadmap to living within your means and slowly achieve the big picture financial goals.
Don’t get too upset when facing these types of budget realities. Your first time budget plan can be a temporary plan. Your budget may feel restrictive at first, but after you take control of your expenses, pay off debt, and build a decent savings cushion, you can start adjusting your most restrictive expense categories and adjust your budget to factor in more of what you find are necessary luxuries.
When you get both the left and right side of your index cards to be close to equal, you’ve theoretically balanced your budget. But you should leave a little extra income surplus to add some important items in your budget.
How to make a budget plan tip 5: Add some important categories to your expense section.
For a budget to be successful, an essential category on the expense side should be personal savings. There’s a saying that remind us to “pay ourselves first.” Growing a savings category is protection against unpredictable expenses and emergencies and will give you peace of mind.
A man who both spends and saves money is the happiest man, because he has both enjoyments. –Samuel Johnson
A good way to save money involves automatically investing a small amount every month. Set up a transfer from your checking account or your paycheck straight to your savings account every month. Start small, as little as ten percent of your paycheck is a good start. As this automatic savings amount becomes a no-brainer, you can increase the amount. Don’t wait to save whatever is left over for savings. Savings should be as much of a priority in your budget as food or rent.
Another important category to include in your budget plan is debt repayment. If you have student or credit card debt, make sure there is a line item for that payment every month. Focus on paying off the highest interest debt first, while the others receive the minimum payment. Once the highest interest debt is paid, take the amount you normally paid towards it each month and dedicate it to the next highest interest debt. Continue this practice until you are debt free.
When you’re finally debt free, take that extra monthly surplus you were paying towards debt repayment and split it between a bump in your savings and to save for a big ticket item or the experiences in life you dream of having.
Now that your budget is complete take a good, objective look at it. Is your budget plan realistic? Let’s be honest, budgeting just enough grocery money to live on spaghetti for the next few months makes it unlikely you’ll stick to the plan. Denying yourself the weekly night of beers with friends will lead you to resent your budget and hate your life.
Make sure that your budget is realistic and you can live with it in a fairly happy fashion. If you can’t find ways to cut other categories or find additional income every month. A good way to add extra money to your budget for the things in life that make you happy include picking up a couple of extra work shifts or overtime, doing some freelance side work on weekends, or finding more lucrative work.
How to make a budget plan tip 6: Stick to your plan and evaluate often.
Now that you know how to make a budget plan and have a solid budget to work with, stick with your plan and make it happen. This requires you to pay attention to your spending habits, commit to living a structured financial life and track how you’re doing. But the rewards are big. You’ll sleep easier at night knowing that you’ve covered your financial bases.
Get into the mindset of planning and waiting for things. Have your eye on a new smartphone or TV? Save for it. Want to go on a trip? Open a travel savings account and put money towards your goal each month.
“Never spend your money before you have it.” –Thomas Jefferson
Check in with your budget every month or two and see how well your plan is going. Be prepared to roll with the punches and adjust. You may find you spent more in one category than normal. Don’t beat yourself up. Instead, try to adjust. Perhaps you can make the difference up by adjusting your spending in other categories. You can have a loosely flowing budget to adapt to your needs each month. But it’s important to track and check in regularly so you can adjust as you go instead of react to a budget shortfall down the road.
How to make a budget plan tip 7: Don’t forget what you’ve learned and practiced.
Remember that how to make a budget plan is a life skill. Don’t forget what you’ve learned and practice it every day for the rest of your life. Your income and net worth will hopefully grow over time, but you should always have a budget, regardless.
When you have money, think of the time when you had none. –Japanese Proverb