Creating a budget is one of the first and most important steps toward financial success and stability. A well-crafted budget can help you tell your money where to go rather than trying to figure out where your money went. In this article, we'll break down the process of creating a budget that’s easy to understand and one that you’ll want to stick to.
Step 1: Determine Your Goals
Before you start your budget, it’s best to think about what you’re looking to accomplish. Do you want to know where your money is going? Maybe you want to save for a car but don’t know how much you can really set aside each month.
If you’re not sure where to begin when it comes to creating your budget, the first place to start is by finding out your Money Milestone. This will be your roadmap and financial plan to help you achieve financial freedom and accomplish each step along the way.
Whether it’s building emergency savings or paying off debt, your Money Milestone will give you a set goal to work toward.
Step 2: Evaluate Your Income and Expenses
You’ll need to look at what money is coming in every month and what money is going out. This is known as your income and expenses. Write down all of these totals with pen and paper or on an Excel spreadsheet for you to reference in the future and update your totals as needed. Use our free Goals & Budgets tool to help you create and maintain a budget easily from your FAIRWINDS Mobile App or Online Banking.
Assess Your Income: This part is simple. You can figure out your monthly income by looking at your pay statements. Be sure to account for post-tax earnings to see what you’ll really have in your bank account.
List Your Expenses: To calculate your expenses, add up everything that you have spent in the last month. Make a note of expenses that you pay regularly. This includes fixed costs that don’t change, such as rent, insurance, or loan payments. Then, add up all your payments that may fluctuate in cost, like groceries, utilities, or gas for your car.
Step 3: Create Categories or “Buckets”
To keep your budget organized, you’ll want to create categories for each type of expense. This can be as detailed as you want it to be! You can start with the fixed and variable expenses determined in the last step and break them down further depending on what your goals are.
Some additional examples of categories to budget for are paying off debt, charitable giving, money to put towards savings, or unexpected expenses.
You’ll want to make sure that you have at least $1,000 in an emergency fund. If you’re working to build that fund, or you’re currently paying off your debt with the debt snowball method, make sure to include those as a part of your budgeting plan.
Also include seasonal expenses to plan ahead for, like yearly doctor visits, Christmas and birthday gifts, or back-to-school shopping.
Step 4: Give Yourself Room to Spend
Budgeting doesn’t mean you can only purchase the necessities. If you start out with a budget that is too strict, you may get burnt out and not revisit it in the future. While you want to be disciplined and reach your financial goals, still allow a smaller portion of your budget to go to your non-essential purchases or “wants.” However, make sure that you’re able to pay for your non-essential purchases in cash – rather than with a credit card.
Step 5: Review and Adjust as Necessary
Set a schedule to review your budget to see if you're staying on track. If you’re newer to budgeting, get into a good rhythm by reviewing your budget with each pay period. As you get comfortable over time, we recommend reviewing your budget monthly to help you be confident in knowing exactly how every dollar is being used.
If you consistently overspend in a category, see where you can spend less in another area to ensure you have the money available to meet your needs. Be flexible and willing to adapt your budget to changing circumstances or unexpected expenses.
Creating a budget can help you to have a mindset of mindful spending and intentional saving. No matter what Money Milestone you’re currently on, having an ongoing and accurate budget is critical to helping you achieve financial freedom.
Take the first step and pave the way for a future of financial confidence. There’s no better time to start planning than now!