Six Basics of Building Your Budget

Building a budget is all about perspective. If you think of your budget as the only thing between you and a more lavish lifestyle, there’s a good chance it fails. But if you look at your budget as the key to unlocking more financial freedom, your budget has every chance of succeeding. With the proper perspective as a foundation, the rest of your budget can start to take shape. Here are the 6 basic building blocks for constructing a successful budget.

1. Calculate Your Income

The first part of building a successful budget is to calculate your current income and savings. Add up your cash and the amounts in your disposable accounts and write the figure down on a piece of paper or spreadsheet. Next, write down your monthly take home pay. If your income fluctuates from month to month, look back at the past several months or years to get a better idea of your average monthly income. If you’re still unsure of what your monthly income is, start with the lowest amount you’ve made in the last six months.

2. Categorize Your Expenses

With a better idea of your income, it’s time to track your outgoing money. Again, look at your bank statements over the past several months. Then write down all the categories you spend money on, including rent/mortgage, food, transportation, phone, and individual utilities. For each category that has a fixed expense, write down a dollar figure next to its name. For yearly costs and those that vary, estimate monthly averages and jot down those figures as well.

3. Evaluate Your Spending

Because the whole purpose of a budget is to make sure that you spend less money than you make, if your monthly expenses total more than your monthly income, you’ve got a spending problem. After you’ve calculated your monthly income and expenses, compare the two figures and evaluate your spending habits. Look for areas where you feel you’ve been spending too much money – the discretionary categories like entertainment and eating out are the usual suspects. These categories where you’re spending too much should be your focus as you create your budget.

4. Follow the 50/30/20 Rule

A good rule of thumb when creating a budget is to follow the 50/30/20 rule. That is, limit spending to 50% of your take home pay on needs and 30% on wants. Then put the remaining 20% toward savings. Necessities include the obvious categories of transportation, groceries, and living expenses. But there are gray areas, including eating out, which could fall into either wants or needs. There’s really no right or wrong answer. Where you put each category should be a personal decision since a budget will be different for each person. Just write down a budget goal for every category and try to limit your spending to just 80% of your income.

5. Track Your Purchases

Because your budget is completely personal to you, your decision for tracking expenses should be made with convenience and personal preference in mind. Pen and paper is handy for simple budgets. A spreadsheet can help you perform even complex calculations with ease. And there are plenty of phone apps that can sync with your bank account to keep track of every penny you spend. Whatever method you use, stay consistent and don’t miss an entry. Subtract each purchase from its corresponding category amount and you’ll always know exactly how much you have left to spend on groceries, clothes, entertainment, etc.