A budget may bring to mind a mountain of receipts and giving up buying all the things you love. So it’s no wonder many people are hesitant to make a budget and stick to it! But did you know a budget can actually give you financial freedom? It shows you how you’re spending your money and puts the control in your hands to change the course of your financial future. And if you’re struggling with debt, stressed about saving money, or you just want a better idea of your financial health, a personal budget is a must.

We’re going to walk you through setting up a budget and becoming the master of your money.

Building a Budget

Step 1: Determine your monthly take-home income. Also called net income, this is the money you receive after taxes, deductions, and any garnished wages (for child support, alimony, some student loans, etc.) are taken out of your paycheck. If you occasionally receive overtime pay, it’s best not to include this as part of your net income. Overtime can be used to establish your rainy-day fund or pay off loans and debt faster. If you cannot make a basic budget work without your overtime pay and it is constant, use your best judgement including it as part of your income.

If your income varies from week to week because your job includes tips (like for wait staff or hair stylists), look over the past six months to determine your average monthly income. (Add all net income for those six months and then divide by six.)

Other sources of income, like child support, social security, disability, and rental income, should all be included in your net income.

Step 2: Track your monthly expenses. This step requires diligence but is crucial in understanding your current financial situation. We’ll offer guidelines to help, don’t worry!

Create an expense journal and for a month record everything you spend money on, week by week. This includes groceries, pet care, haircuts, gas, utility bills, insurance, morning coffee drinks, etc. Everything goes in the journal (or phone app like Dollarbird, Penny, Wally, or Mint). It’s easiest to keep a record as you spend, logging in your journal at the end of each day. If you wait until the end of the month, it may feel overwhelming and you may forget some purchases. Remember to keep all receipts so you can go back and make accurate entries if you do go several days without recording purchases.

At the end of the month, you should have an accurate picture of how you spend your money. This might include some surprises about how much you spend on eating out or impulse purchases. Don’t despair, the first step in improving your finances is understanding your current habits. Knowledge is the start of change.

Step 3: Build a budget and adjust habits. Add up your net income and then subtract all of your expenses from your month of journaling. The goal is to have more income than expenses, so you can save for larger purchases and life goals. If your current budget and lifestyle are out of balance and you are spending more than you make, it’s time to adjust your budget by cutting back on wants and comforts and finding less expensive ways to pay for your needs.

One of the trickiest parts of creating a budget is separating needs from wants. To make it easier, think of it this way: a need is something that keeps you employed, a roof over your head, food in your stomach, clothes on your back, and debt collectors away. Once you have ensured all of your needs can be paid, you can move on to wants. A basic list of needs would include:

Groceries

• Car and car insurance payment, gas, parking fees (if you need a car to get to work)
• Utilities (gas/heat, water, electricity)
• Health insurance, prescriptions
• Loan/debt payments (student loans, credit cards)
• Rent or mortgage and renter’s or homeowner’s insurance
• Phone
• Personal care (hair cut)
• Clothes
• Child care (if you have children)

If your budget is tight just paying for these necessities, look into ways of saving money on them: use coupons, switch insurance companies for a lower rate, find a less expensive cell phone plan, shop for clothes at the local thrift store.

Once you know how much discretionary income you have each month (money not required to pay for needs), you can decide which “wants” to include in your budget. Wants include:

• Entertainment (movies, video games, concerts, DVD rentals, sports events)
• Eating out (including that morning coffee and happy hour with friends)
• Vacations
• Specialty personal care (nails, hair dying, waxing)
• Donations/charity
• Gym membership
• Hobbies
• Birthday/gifts
• Cable/Satellite
• Phone upgrades

Step 4: Set goals and save! Make sure you don’t spend all of your discretionary income on wants. It may be tempting, but saving money is as crucial as paying your rent. Savings can be used to pay for unexpected medical expenses, car repairs, and bills if you lose your job. Ideally, you want at least six months of “needs” expenses saved in a rainy-day fund. Saving that much may feel overwhelming, but if you create a space for saving in your budget, you’ll get there before you know it! Consider swapping out one of your wants for putting money into a savings account. For example, instead of spending $30/month on movie tickets, put that money in savings.

There are other things to save for as well, of course: retirement, kids’ college funds, a house. But when first creating a budget, the most important thing to focus on is paying your immediate bills, followed by creating a rainy-day fund and then paying off debt. If you focus on each thing in turn, you are more likely to succeed!

Step 5: Stick to your budget and keep it updated. Once you have a budget that is balanced—all needs are paid for, some wants are included, and a savings plan is in place—make sure to stick to it! Your budget will help break the cycle of debt and achieve other financial goals only if you follow it.

Make sure to update your budget so that you stay on track for your goals, like becoming debt free or going on that dream vacation. Jobs change, insurance payments go up and down, credit card debt is paid off. It’s a good idea to review your budget every three months and adjust as needed.

Tips to Stay Focused and Disciplined

A budget takes understanding, focus, and discipline. We started you off with the understanding of how to create a budget, now here are some tips to stay focused and disciplined.

Don’t be too hard on yourself – it’s important to treat yourself in small ways so you’re not tempted to blow your budget on something bigger. Instead of buying a specialty coffee every day, get one only once a week.

Keep your goals visible as a reminder. Saving for a dream vacation? Put a picture of the destination up at work. Living on a budget to pay down student loans? Keep a fun count-down calendar handy so you can track your progress.

Remember, even if you’re living in a crunch and seeing how little money you have feels scary, a budget relieves the anxiety of the unknown and shows you where to make changes. It’s better to be in control and know than to live in the dark in fear.

A budget allows you to not only survive today, but also save for tomorrow. It reduces the uncertainty in life. Want to reduce that uncertainty even more? Check out our other articles on the Financial Resources page and learn about other financial education and services from your local credit union.