Everyone can benefit from a little help now and then when it comes to financial literacy. One of the first steps in improving your own financial literacy is creating a budget. However, 65 percent of adults in a 2020 survey shared that they had no idea how much money they spent the previous month.
If this sounds like you, it’s time to actively manage your money and start achieving your financial goals.
Step 1: Calculate your income
First, determine your take-home income. If you only have one job with a set number of paychecks per month, this is straightforward. If you have post-tax deductions, such as health insurance or a 401(k) contribution, add these back into your take-home income. They’ll be accounted for further down in the budget.
If you’re self-employed or have side gigs for which you have to take taxes out yourself, figure out your post-tax pay.
Step 2: Identify all expenses
Next, determine where your money goes each month. Make a list of every single expense:
- Rent or mortgage payments
- Internet and/or cable
- Cell phone
- Loan payments
- Maintenance (for your car, your house or other assets)
- Entertainment/miscellaneous (like streaming services, date nights, mid-day lattes).
- Contributions to a savings account
This is also where you add back your health insurance, 401(k) and any other deductions you added to your take-home pay earlier. Printing out your bank statements and going through them with a highlighter is a great way to get a good idea of your overall expenses. This works even better if you look at multiple months and use an average to account for variations in items like gas, groceries and entertainment.
Step 3: Categorize your expenses
Next, categorize each expense as either fixed or variable.
Fixed expenses don’t change much between months, like your rent, some utilities and cell phone plan.
Variable expenses might change between months, such as gasoline or groceries, or may only appear once in a while, like buying a birthday present for a loved one.
Step 4: Do the math
Add up all your expenses and subtract it from your take-home pay.
If your result is a negative number, you’ll need to make adjustments. If it’s positive, you’re in pretty good shape. But, if you’re like many people, there’s probably still room for improvement.
Most of the changes you’ll make will affect items in the “variable expenses” category. Perhaps you’ll resolve to spend less on holiday gifts or limit the number of days you eat out.
If making adjustments to variable expenses isn’t enough, look for ways to cut down on your fixed expenses. You might cancel your cable, adjust your cell phone plan or begin looking for a less costly apartment.
Step 5: Maintain the budget
Writing out a budget is a fantastic first step and one that most people don’t complete. If you get this far, you’re already ahead of the game. Even so, your financial literacy can’t end with the completion of a spreadsheet.
If you’ve identified areas to cut back, begin working on these right away. Shop for that less-expensive cell phone plan, and give yourself a deadline.
You might also devise a system to determine when you can afford to make a certain purchase. In a guest post for Entrepreneur, Paul Morris explained that he asks himself two questions before making any out-of-the-ordinary purchases:
- Am I on track for my financial goals?
- Will this add value to my life?
If the answer to either question is no, he doesn’t make the purchase. This prevents him from making a purchase he can’t afford or will regret later on. The key here is to create a system of mindful spending habits that you can follow.
Follow these five steps and you’ll be well on your way to creating a budget that works for you. Another part of a successful budget is choosing the right budgeting method.
Every good budget needs a great plan. Need additional help with planning your budget? Find additional budget resources here.