How to Create a Personal Budget

Chelsy Meyer  | 

Whether your budget is a disaster every month, or you’re just looking to fine tune your finances, creating a personal budget can do wonders in the way that you view your income. A budget will answer questions like ‘how much money you make’ and ‘how much you owe.’ It’ll tell you where your money is going, and how to make the appropriate changes in order to put that money where it should be going. It’ll help you save money and bring you closer to your financial goals. By following a few budgeting guidelines and implementing some financial tips into your life, you can get your budget down to a science.

Tracking Your Income

If you are paid a salary or receive regular paychecks, it’s a little easier to calculate your after-tax income. Just be sure to subtract deductions from your paychecks, such as Social Security and health insurance, when calculating your monthly and yearly take-home pay. Also include any income from other sources. If you have irregular income it can be difficult to figure out your monthly income, but you can find a number that works by figuring out the average amount you made in the last six or 12 months. Stick to the conservative side of this average so you don’t find yourself in trouble during the lower income months.

Knowing your annual income is important for big expenses and understanding your worth on a broader scale, but it’s also important to understand your budget on a monthly scale as well. Generally speaking, you shouldn’t be spending more money than you take in each month, and calculating what you’re bringing in is the first step in making sure you’re not overspending.

Know How Much You Owe

This part of budgeting can be daunting, but it’s time to stop ignoring your debt and begin to work towards paying it off. This means tracking down every high-interest credit card, doctor bill, student loan, personal loan, and title loan you have floating around. Contact each one and set up a plan for repayment. If you have manageable debt, you can utilize the popular 50/30/20 budget plan. In this plan, you allocate 50 percent of your income to needs, 30 percent to wants, and 20 percent to debt and savings. This is just a baseline, of course, but it’s a starting point when considering what to do with what you owe.

By making a plan to remedy your debt, you’ll be improving issues in the eyes of credit agencies that assign your credit score. Getting a handle on managing what you owe is not only imperative for your stress and survival, it also sets you up with the habits that make you an attractive candidate for lenders if you’re interested in getting a car loan, going back to school, or opening a business.

If your unsecured debt can’t be paid within five years, or it equals half or more of your gross income, you should look into debt relief programs meant for an extreme case, which may mean looking into bankruptcy. Otherwise, setting up payment plans moves your debt from this bracket into the 50 percent “needs” bracket along with other bills.

Tracking Expenses

Now is the time to track the other things that go into your budget:

  • Housing
  • Groceries
  • Utilities and other bills
  • Minimum loan payments
  • Child care
  • Transportation
  • Insurance

These would all be considered your “needs” and should take up 50 percent of your budget. However, everyone’s situation is different, and you may need to sacrifice some of the 30 percent in your “wants” to compensate. If your needs fall under the 50 percent, you know you may be able to afford to save more money, purchase a new car, or go on a vacation. Tracking how much you need to spend per month on your essentials will help you understand your overall financial standing. If your income is only covering your debt and your needs, you’ll have to look closer into cutting down some expenses, or learning more about options for debt relief.

Also, track the expenses associated with your “wants” to discover if you have any money holes in that area. Maybe you’re struggling to save money, but you track your expenses and realize you’re spending 20 percent of your monthly paychecks on eating out every month – this is something you can fix once you’re aware of it.

Make Changes Accordingly

Once you’ve discovered what you make, what you owe, and what you spend your money on, you can now make the appropriate changes to your budget. You can cut down on entertainment every month and transfer that portion of your income towards savings instead. If your budget is too tight, find places to cut down – this usually means reevaluating your “wants” category. Practicing some frugal living tips here and there can help, and so can learning how to make your money go further when you’re shopping. You can make small changes to your “needs” as well by taking public transportation a few days a week, using coupons when grocery shopping, or minimizing phone or internet packages in your utilities. If you look for it, there are always small ways to save.

By eliminating any bad financial habits, you will save a lot of money and financial heartache in the future. Be honest about any senseless spending problems you have and remedy them. Eliminate late fees and dings to your credit by always paying your bills on time.

The Importance of Saving

If you’re in a sticky situation with debt repayment, you may have to save and focus on debt repayment in the same 20 percent section of your finances. Just be sure not to put saving on the back burner of your budget. First of all, everyone should work towards an emergency savings fund in case of any financial emergencies. Some recommend the amount of a few months of living expenses to be saved, but even something as small as $500 can make a huge difference. Financial emergencies can lead to dangerous monetary predicaments associated with predatory lenders, skipped payments, high interest rates, and damaged credit. It can cause a snowballing effect in your finances that should be avoided at all cost.

Not only is an emergency fund important to save for, but so is long-term saving for retirement. For many young people it can be difficult to push for prioritizing something that is so far in the future, but putting off these savings can set back your retirement nest egg dramatically. Take advantage of any money your employer is willing to contribute to your 401(k) or consider funding a Roth IRA.

Keep Checking In

Once you’ve found the right balance for your budget, put it into practice and stick to it as closely as you can. Every budget needs some wiggle room, but exercise discipline and stay on track with your finances in order to test its practicality. If you find issues, adjust accordingly. By following a budget you’ll have a better understanding of your finances and how you should be spending your money.

Continue to track your budget every few months and search for opportunities for improvement. Getting a raise, paying off a loan, or an increase in expenses can all have an effect on your budget, which is why it should be a fluid thing that you track and maintain. Don’t be too lax, but don’t be too strict with it either. It should be a realistic guideline for your finances in order to maintain a healthy balance in your bank account.

Since each person’s finances are different, it can be difficult to make a guide for personal budgeting that fits everyone. However, with a few tweaks, these guidelines can help turn your budget from disarray into something you can count on. You’ll know what you can afford to spend on a night out, on groceries, or on a vacation ahead of time. Instead of going month by month hoping your finances stay out of the red, budget yourself and ensure that they do. Calculate your income, know what you owe, track your expenses, make adjustments to your spending, save money, and continue to track it and you’ll be in control of your budget every month.


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Chelsy is a writer from Montana who now lives in Boise, Idaho. She graduated with her journalism degree from the University of Montana in 2012. She enjoys talk radio, cold coffee, and playing Frisbee with her dog, Titan. Follow Chelsy on Twitter @Chelsy5

This post was updated April 12, 2017. It was originally published April 5, 2017.