Step 2 of your financial wellness: Creating a Budget
Now that you’ve tracked your spending and carefully recorded where your money goes over a month, you’re ready to move on to the next financial wellness step: creating a budget. Budgets play a crucial role in promoting financial awareness, which leads to more responsible money choices.
Let’s take a look at how to create a budget and review some popular budgeting systems and how they work.
Create a budget in 5 easy steps
- Track your spending and income. This includes all your financial documents, such as account statements, bills, and pay stubs. [If you’ve followed Step 1, you’ve already completed this step–excellent work!]
- Tally up your totals. Calculate the totals of your monthly expenses and all streams of income.
- List your needs. These include anything essential for living and basic functions, such as mortgage payments. As you list each need, write down its corresponding cost. When you’ve finished, sum the total of all your needs.
- List your wants. This list includes anything not essential for living, like entertainment costs. Here, too, note the monthly cost of each item on your list and add up the total when finished.
- Assign dollar amounts to your expenses. Open a new spreadsheet and copy your list of expenses. Assign an appropriate dollar amount for each cost.
- Review and tweak as necessary. To keep your budget relevant, you will likely need to adjust the amounts in each expense category at least once a year.
Budgeting systems
There is a wide range of budgeting systems to fit every kind of money management style.
- The traditional budget. After working out a number for every expense category, you’ll track your spending throughout the month to ensure you’re sticking to the plan.
- The money-envelope system. At the start of the month, withdraw the amount you plan to spend on all non-fixed expenses in cash. Divide the cash into separate envelopes, designating one for each expense. Then, withdraw cash from the appropriate envelope when purchasing that category.
- The 50/30/20 budget. Set aside 50 percent of your budget for needs, 30 percent for wants, and the remaining 20 percent for savings.
A well-designed budget can provide you with a sense of financial security and freedom. Start budgeting today! Do you stick to a strict monthly budget? Please share your best budgeting tips with us in the comments. If you missed the first step, you can find it on our MoneySmart Tips Blog, How to Track Your Spending.
