Create a Budget

The budget is the most important tool in the personal finance toolbox. It allows you to track your income and expenses, so you know exactly where your money goes each day, month, year, etc. A budget helps you avoid overspending, prepare for emergencies, pay bills on time, and steadily build up your savings—making your financial goals feel much more achievable. 

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Key Ideas

• A budget is a plan for your money.
• A budget is like a money mirror, helping you see the big picture when it comes to your income and expenses. 
• Choose a budgeting tool that best suits you—an app, a spreadsheet, a website, paper and pen, an envelope system, etc.
• It won’t happen overnight. It takes practice to develop a budget, and it takes time and reflection to learn how to stick to a budget.  

Activities

Create a Budget in Six Steps

1. Determine available income and your starting balance. 
2. Make a list of your expenses, organize them by fixed (rent, food, etc.) and variable (heat, travel, etc.).
3. Further organize/identify expenses by monthly vs. periodic vs. annual. Sometimes it makes sense to divide annual expenses by 12 and list those amounts each month. You can also pay them in full once a year by planning for that amount in advance.
4. Identify whether expenses are “needs” or “wants.”
5. Compare income and expenses—make cuts and redirect that money to meet goals.
6. Create a budget that includes savings and building an emergency fund. Try using FAME’s budget worksheet to help you get started.
7. Evaluate and adjust periodically. Look for areas where you can redirect money for savings, paying off debt, etc.
8. The strictness of a budget depends on your financial situation. If you are barely paying your bills and cannot save, then the budget needs to be tight. If you are saving and paying bills on time, then the budget should be more of a guidance system rather than a straitjacket.