Ok, show of hands. Who here made a New Years resolution (or goal) to finally get their finances in order this year? I know this is a constant goal of mine. I have loved keeping track of my money since I was a little kid, and am always working to improve my financial system. One of my favorite activities when I was little was counting my allowance money, and keeping meticulous records of my ‘income’ and ‘expenses’ (yeah… I was a weird one).
As someone who loves to organize and track her finances, I wanted to share with you guys how I do it. I know financial organization may be something not everyone even thinks about. But I think organizing your finances, and knowing/controlling where your money goes, is so so important, and something everyone should work into their lives.
Today, we’ll be starting with the basics of organizing your finances, by talking about how to make a budget. Whether you’ve always kept an eagle eye on your money, or you’re completely new to budgeting, it’s always a good idea to take the time to write out a budget for yourself, and there’s no better time that now! This will help you be more aware of where your money goes, save more money in certain areas that routinely drain your bank account, and be more financially organized overall.
While writing your own budget can sound scary and intimidating, it is actually a super simple process. Below I’m going to walk you through the 5 easy steps on how to write a budget. These steps will help you outline a personalized budget that fits your exact financial needs.
Step 1: Calculate monthly income
This is perhaps the most important step when writing out a budget. Start by writing out a list of all your sources of income. This include any regular incoming money that will go towards paying household expenses, both needs and wants (which we’ll discuss below).
Next to each source of income you’ve identified, write the monthly amount that source brings in. If you’re unsure how to calculate how much you make each month from your job, try one of these formulas:
Yearly salary ÷ 12 = monthly income
Hours worked per week x hourly wage x 52 = yearly income ÷ 12 = monthly income
Add together the monthly income amounts for each of your sources of income, and you have your household’s total monthly income amount. This number will be the total amount you can budget for each month. If you budget for (or spend) more than you make each month, you will end up in debt. Simple as that.
Step 2: List your needs
The next step you’ll need to take is to start listing the expenses you need to make each month. Each person or family’s needs will be extremely personal, and depend on a variety of factors. Only you will know what you need to spend money on each month.
For example, a cell phone bill may be an absolute necessity for one family, but a luxury if it can be afforded for another. A subscription service (like Netflix, Studio Calico or magazines) could also be considered a need (even if the item is a want), simply because a subscription contract means you need to pay it each month.
Here is what my needs list looks like:
- Gas & electric
- Studio Calico subscription
- Gas (car)
Step 3: List your wants
Once you’ve listed your needs, you can now start writing down your wants. These are the extra things that you could live without, but things you want to spend your money on. Again this list will be different for everyone. This could include a weekly date night with the hubby, or your daily coffee fix or just plain old fun money for whatever the heck you feel like that month.
My wants list looks like this:
- Blog investments
- Craft supplies
- Shopping (clothes)
- Home decor
Step 4: Assign budget amounts
Starting with needs, estimate how much you will/how much you want to spend in each category. Once you assign a category an amount, subtract that amount from your total monthly income. This will give you a new total amount you have to work with. Go down your list of needs then wants, assigning amounts and subtracting from your total. Once you get to the end of your list, or your total drops to $0, you’re done!
The process will look like this:
Total monthly income – needs expenses – wants expenses = leftover income
For example, say you started with a total monthly income of $5,000. You calculated a total of $2,000 for needs ($1,000 mortgage, $500 utilities, $500 groceries) leaving you with $3,000 for wants. After looking at where you wanted to spend your money, you decided how much you wanted to spend on those things ($1,000 savings, $500 craft supplies, $500 home decor, $500 shopping fun money, $500 entertainment).
After writing out your budget, you should know exactly where your money will be going, and how much will be spent in each category.
Step 5: Stick to your plan
You wrote out your budget, now you need to stick to it. With your monthly plan, you can keep an eye on your spending and make sure no category is getting out of control. I use a financial planner to keep an eye on my budget throughout the month. If you see yourself approaching your coffee budget limit two weeks into the month, you know it’s time to slow down, or you’ll have to sacrifice your lattes the last week of the month.
If you find yourself regularly over- or under-spending in a certain category, you may need to rework your budget. It is completely ok to do that. I actually try to sit down and rework my budget every 3-ish months, just to keep it updated with life.
Your budget is only as good as you make it and follow it. Budgets can be a great tool for saving, tracking and handling your money. But when it comes down to it, simply having a budget outlined will not keep your from going over your budget ‘just this once’. Be strong, follow your budget, and make this the year your take control of your money!
Looking for more resources to help you get your money under control? Try these: