Own Your Budget: Creating One Is Easy

monthly budget with budgeted and actual amounts of money spent

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Do you know how much money you have at the end of each month? Perhaps you’re living paycheck to paycheck, and you don’t know why. Today we’re going to talk about how to create a budget using various methods to help you manage your money and prevent overspending.

We’ll go over using a spreadsheet (my personal favorite!), using an app, and using the envelope method. Then we’ll go into how to set the budget up.

What is a Budget

Before we get into how to create a budget, let’s talk about what a budget is. A budget is a tool you use to track your cash flow. In a budget, you track all of your sources of income and all of your expenses.

Budgets are often thought of as boring, restricting, and math-heavy. But a budget can actually help us find where we’re losing money the most and reallocate it somewhere else where we want to use the cash. Budgeting is an effective approach to money management.

For example, if you realize you’re spending too much money on unused subscriptions, you could reel in that spending in and allocate it to something else such as going out to eat (and save some money too!).

Related Post: 11 Life Hack to Drastically Reduce Monthly Expenses

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Why You Should Create a Budget

Creating a budget is an excellent idea because it will help you stay organized and track your income, monthly expenses, and spending habits.

If you find yourself having no money at the end of the month, it might be because you have no idea where your money is coming from and where it’s going. With a budget, you’ll track your spending and be able to set financial goals for yourself.

By using a budget, you’ll be able to create savings goals, better maintain your emergency fund, track irregular incomes, and then by sticking to it, live a financially healthier life.

Related Post: Your Emergency Fund: Are You Saving Enough?

Create a Budget Using a Spreadsheet

If you’re like me, you’ll use a spreadsheet. Of course, this isn’t the only way how to create a budget, but it’s my personal favorite. There are a lot of free budget spreadsheets on the internet – My favorite is on Vertex42***

With any spreadsheet, you’ll have an area for all of your income and one or more areas for all of your expenses. Some spreadsheets break it down month-to-month, where others focus on a monthly average. I prefer a monthly budget spreadsheet where I can track my expenses each month.

Related Post: Use These 8 Strategies to Stop Living Paycheck to Paycheck

The best part about spreadsheets is that they add up all of your income and expenses for you. Spreadsheets are also either free or only have a low one-time cost.

Create a Budget Using an App

You can use an app like YNAB (You Need A Budget) to track your expenses. This is similar to using a spreadsheet except YNAB provides an easy-to-use interface that you can access easily from multiple devices. It also lets you generate reports that can help you accurately see how you’re spending your money.

The major drawback to YNAB and other full-service budgeting apps is that they have a subscription cost. As of this writing, YNAB costs $11.99 per month, or if you pay by the year, you can save $59 by paying $84/year.

While it’s nice to have a premium budget app, many people who take on making a budget for their personal finances are trying to save money and don’t want a subscription service.

Create a Budget Using the Envelope Method

Another budgeting method is known as the envelope method. This is when you take physical envelopes and mark them with categories of your budget and put cash in them. If you were budgeting $200 per month to eat out, you would write down “Eat Out” on an envelope and place $200 cash in it. The same would be true for any other expense.

The trick is – if you spend all of your money in an envelope, you’re done with that envelope for the month. So if you burned the $200 that you budgeted for eat-out money in 3 weeks, you wouldn’t eat out for the rest of the month.

This is one way to reel in spending if other methods aren’t working. It does take a bit of discipline, but some have found this budgeting method helpful.

How to Create a Budget (Continued)

Now that you’ve chosen a method, let’s talk about building out your personal budget! Assuming you went with a spreadsheet, an app, or similar, the first thing you need to do is create a section for your income, a section for non-discretionary expenses, and a section for your discretionary expenses.

You can break this up further into more categories or subcategories, but this is your starting point. You may also consider categorizing which of your expenses are your fixed expenses (ones that never change) and which are your variable expenses (those that change month-to-month).

Income is your incoming money from jobs, side hustles, gifts, and more.

Non-discretionary expenses are the expenses that you must pay to get by, such as rent, auto payments, groceries, etc.

Discretionary expenses are the expenses that you could do without. This includes entertainment, eating out, and subscriptions.

Let’s get into each section in more detail.

Budgeting Income in Your Spreadsheet

When coming up with your income section, make a row for each source of income you receive, no matter how regular or irregular it is. If you’re doing a monthly summary, your best bet is to add up your projected (or historical) annual income and divide by 12.

So if you receive $600 from a side hustle, but only four months out of the year, you would take $600 x 4 months to get $2,400. You would then divide that by 12 to get an average of $200 per month from that source.

Related Post: The Best Side Hustles You Can Do In 2020.

Note! Make sure you save your money to last all year if you’re only receiving it a few months a year but need the money for expenses year-round.

For example, we have a vacation rental that only pays us one to two months a year. We use this money to pay forward several months’ worth of expenses, so we take the projected annual income from this rental income and divide it across 12 months of expenses.

If you’re budgeting month-to-month, simply put the $600 income in the months you earn it.

Once you’ve got your income set up, it’s time to move on to non-discretionary expenses.

Budgeting Nondiscretionary Expenses

As said above, your non-discretionary expenses are expenses you cannot live without. This is rent, loan payments, food, and other necessities. This is not your gym membership or your video game subscriptions.

This is your gas money to get to work, not your energy drink fund (I have an energy drink fund – I know, it’s bad!)

The best way to determine how much you’re spending on each expense is by looking at bank statements or credit card statements. As much as some people swear away their credit cards, credit cards are super handy for expense tracking. Your credit card company will break down each expense into categories and show you each individual charge per statement.

Related Post: The Top Benefits and Biggest Drawbacks to Having a Credit Card.

After you fill out your non-discretionary expenses, don’t yet pay attention to your leftover income. We’re first filling out the budget, and we’ll worry about issues after.

Budgeting Discretionary Expenses

Moving on to discretionary expenses, these are the things you want in life but do not require to get by. You want to keep your discretionary expenses to a minimum when you’re living on a tight budget. These things include eating out, subscriptions, entertainment money, clubbing, and so on.

When figuring out your discretionary expenses, it’s important to note that you don’t want to be miserable. You’ll want to cut back, not eliminate completely. Leave yourself money every month (or week) for fun. There’s no point in working yourself to death.

Getting Your Net Monthly Income

Okay, now that you’ve filled out these three sections, the next thing to do is add it up. If you’re using an app or spreadsheet, this should be done for you.

Your added up income should go into a Total Income section. This should be total income for each month and the year. Then you need a Total Expenses section, which can be divided across each category or, at the very least, non-discretionary expenses and discretionary expenses.

Finally, you’ll need to subtract your expenses from your income to get your net income.

If your annual net revenue is positive, you’re making money each year. This is great! You may still be able to improve your situation, but an initial glance says you’re in a good place.

If your annual net revenue is negative, then you have some work to do. Never fear! Let’s talk about what to do then.

How to Cut Back on Expenses

I bet you saw this coming. You’re going to find ways to cut back all of your expenses, starting with your discretionary expenses! That’s right. Cut back stuff you don’t need. Leave some money as fun money, but go through each item and figure out what you can do less of.

Can you save $20/week by going out to eat one less meal a week? Can you chop some money by canceling that game subscription you’re no longer playing? I know you can find something.

Using an app like Trim will help identify your recurring expenses. Trim can then automatically negotiate your bills or cancel subscriptions that you're not longer using.

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Then, move on to your non-discretionary expenses. These might be harder to cut back on but do your best.

Can you shop at a grocery store that has better prices or use an app like Ibotta to save on all of your shopping trips? Would you be able to lower monthly living expenses by following a few simple steps?

By cutting back on your expenses, you’ll be able to do things such as pay off credit card debt and get out of debt in general.

How to Make More Money for Budgeting

You can also add to your income to stop living in the red (or increase your revenue further). As discussed earlier, do so by taking on a side hustle. You don’t have to do a side hustle forever, but if it improves your situation now, do it as long as you need it.

LEARN HOW TO SAVE UP TO
$10,000 EACH YEAR

Download our 11 step guide on how to save up to $10,000 each year. You’ll also get regular money-saving tips sent straight to your inbox!

Unsubscribe at any time. We will not sell your information.

Related Posts:

Wrapping It Up

In this post, we talked about budgeting. I recommend that everyone create a home budget for themselves. It helps you stay organized and figure out where your money’s going. From there, you can add your money to an online savings account or invest the money for your future. Stick to these habits, and you’ll be much better at managing your money.

Having a home budget has helped me so much. I consider it one of my top personal finance necessities. With a budget, you can start paying down debt faster and investing more for your future. This leads you up the steps of financial freedom.

In this post I go over how to create a budget using apps, spreadsheets, and the envelope method. You'll learn how to track your income, track your expenses, cut back, and increase your money each month. Learn everything you need to know about budgets here!

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