How To Create a Budget & Control Your Expenses Like a Pro | Budget Planner & Tools That Really Work

Last Updated on 18th Sep, 2022

Wondering how to create a budget as a beginner? A budget is a financial tool that helps individuals and families track their spending, plan purchases, and practice saving for the future. In this guide, we will walk you through the process of creating a budget with step-by-step instructions.


How To Create a Budget & Control Your Expenses Like a Pro | Budget Planner & Tools That Really Work

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Wondering how to create a budget as a beginner? A budget is a financial tool that helps individuals and families track their spending, plan purchases, and practice saving for the future. In this guide, we will walk you through the process of creating a budget with step-by-step instructions.

To reduce your spending and manage your money successfully, you need to see where your money is going. In addition, knowing where your money goes or should go helps to provide a “big picture” of your financial situation and makes it easier to develop a strategy for improving where you are.

No matter your financial situation, whether good or bad, it’s a great idea to create a budget. It’s also essential to stick with your budget, paying attention to how you’re doing along the way. Otherwise, your budget may not work for you.

Many people feel a budget may be a buzzkill because they think it means you can’t have any fun with your money.

But, that’s not true.

You can definitely enjoy your money while you track and manage it properly.

The word budget is frequently associated with restricted spending. But I’m here to let you know that a budget does not have to be limiting to be effective. A budget can be a wonderful way to save for the future, plan for big purchases, and even spend your money just the way you want.

Your budget is supposed to act as a summary that compares and tracks all of your income and expenses. It’s a financial tool that helps you better understand where your money is going.

Setting up your personal budget will show you precisely what you can expect when it comes to expenses. Don’t view a budget as a negative. Instead, view it as a tool to help you achieve your financial goals.

Because your personal finance is an extremely important issue.

So, without further ado, let’s take a closer look at how you can set up your very first budget and start saving more money.

Let’s start from the basics…

What is a Budget?

A budget, simply put, is a way to control your money. It’s a plan for how much money you can spend and also when you can spend it.

To be more specific, a budget is a plan that details how much money you can spend on certain things like food or entertainment. Conversely, you can also budget how much money will be saved.

When you learn how to create a budget, you’re implementing a financial planning tool that will allow you to understand how to spend or save every month. A budget is the best way to track your spending habits in the short and long term.

Even if creating a budget may not sound too exciting, it’s an essential part of managing your money. And that’s because it all comes down to balance.

Think about it:

If you spend less in one area, it only makes sense that you can spend more in another. That means you can save the excess money for things like:

  • Vacations
  • Gifts
  • A large purchase
  • Emergency funds
  • Building your savings
  • Investments

For a budget to be effective, you’re going to need to be honest about your spending habits. You must be willing to work hard to decrease your expenses on items that don’t offer any long-term value.

The overall goal of having a budget is three things:

  • To spend less money than you earn
  • To use the surplus to pay down debt or save for future needs
  • To help you set financial goals that are realistic

If you can successfully meet those three goals, your financial future will be a lot brighter. And, that’s why getting all of your expenses documented upfront is critical. You’ll be able to see exactly how much you’re spending and be able to plan for any “surprises” that may come up during the month.

Finally, a budget is a living document that can be adjusted as needed.

How Your Spending Habits May Shock You

It might come as a shock to you when you create an accurate budget. By tracking your spending each month and seeing it right in front of your face, it may be quite jarring to see how much money you spend on certain things like:

  • Hair and beauty products
  • Coffee
  • Gym membership
  • Magazines
  • Pizza
  • Eating out at restaurants
  • Clothes
  • Vacations

You may be surprised to find out how much you spend on certain things that offer low or no value to your life.

Most people who aren’t sure how much they should be spending don’t realize how quickly a few of these expenses can add up.

For example, let’s assume you buy one coffee every morning and one coffee every afternoon. You’re spending $3 dollars on each daily coffee for a total of $6 per day. That means you’re spending $42 per week on coffee. $168 per month. And, that’s just for two coffees each day!

Now, you may think that at least getting the caffeine boost is worth it. However, if you spent that same amount of money on investments, you’d have over $10,000 in 20 years. That’s why having a budget is so important.

Try this exercise:

For one month, I want you to keep track of every penny you spend.

Don’t hide anything, and be honest.

Go through your receipts and keep track of everything – whether it’s a $5 coffee or buying lunch for everyone during the day. You can use a spreadsheet, or an excel sheet, or write it down in a notebook.

Then, once you have all of your expenses written down, add them up.

Finally, take a look at what that number says about where your money is going. You may be surprised when you see the total amount. And, it’s really possible that your expenses will be more than what you can actually earn.

For example, if you’re living paycheck to paycheck or spending more than what you make on a monthly basis, it may be time to cut back on expenses. You can start by deciding what things you really value in life – like traveling, buying new clothes each season, or treating yourself to a daily coffee – and make it work from there.

Gather Up All Your Expenses

To get started with creating a budget, you need to gather up all your expenses. You don’t want to go into this process with only a rough idea of what you’re spending and hope for the best.

Instead, you need to use a pen and paper (or spreadsheet) and write down every single expense you’ve incurred over the past days or months. This will be your starting point to creating a budget you can actually stick to.

In recent years, smartphone apps like Mint and Monefy have made it easy to keep track of all your expenses. They help you track money coming in and going out, so you can start to put together a budget.

You don’t need to know exactly how much money you’re making and spending to start using a smartphone app to help you. Instead, all you need is some idea of where your money is going, and you’re ready to get started.

Then, take a careful look at:

  • Banks
  • Investment accounts
  • Recent bills
  • Paystubs
  • Credit card bills
  • Receipts from the last three months
  • Mortgage and auto loan statements

You need to be able to have access to any information about your income and expenses. You may want to connect your bank accounts and investment accounts to your budgeting app or software.

But, if you don’t want to link to your bank accounts you’ll have to enter all the information manually into the budgeting tools.

Choose what you feel most comfortable with, so you can have the best chance at succeeding. When you have all of your information gathered up, the next step is to create a budget that’s going to work for you.

How to Calculate Your Income?

Do you know how much income you should expect every month?

If not, then you’ll want to take a good look at your paycheck. You should be able to find the gross amount? The gross amount is the total income for a given period before taxes and other deductions are taken out from your salary.

Next, take a look at how much is taken out for taxes. You can calculate how much has been paid in taxes by looking at your paystubs.

It’s easy if your income is a regular paycheck with taxes automatically deducted. You can simply use the net income.

It may not be as easy if you are self-employed or have irregular income.

And if you have outside sources of income like child support, disability, interest, dividends, rental income, or anything else, be sure to include them.

The first thing you want to do is start with the amount of money you make after taxes every month. And if your compensation varies because of something like self-employment, then using a monthly average is alright.

Once you know your monthly income, it’s time to start working on your budget. It’s the right time to decide what expenses you can cut back.

How to Calculate Your Expenses?

Now that you have your income calculated break up your monthly expenses into specific categories. The most common categories are:

  • Mortgage/Rent
  • Vehicles
  • Medical
  • Insurance
  • Utilities
  • Groceries
  • Entertainment
  • Eating out
  • Home pay
  • Child care

You should also use additional categories like:

  • Vacation
  • Clothing
  • Travel
  • Student loans
  • Subscriptions/Memberships
  • Gifts
  • Giving/Charity
  • Savings
  • Debt repayment

Fixed expenses are the necessary expenses that you pay every month. These may be expenses like your rent or mortgage payments, car payments, internet service, trash/recycling, and your insurance.

You’ll also want to include regular credit card payments or any other required expenses that tend to stay the same every month.

Fixed expenses are the easiest to add to a budget.

Variable expenses are the ones that can change from month to month, like your utilities or grocery bills. Variable expenses like groceries and gas may be higher some months than other months.

However, you’ll know that they are your variable expenses because they usually fluctuate from month to month. For example:

  • Groceries
  • Gas
  • Medical
  • Entertainment
  • Eating out
  • Gifts
  • Clothes
  • Personal care

Begin with your fixed expenses and assign a spending value to each category. Next, estimate how much you may spend per month on variable expenses.

If you’re unsure how much you spend in each category, review previous credit card and bank transactions so you can make a rough estimate.

These can help you to identify all your spending.

Be sure to include a category for unexpected expenses, so if something comes up you’ll have the money set aside.

If you are planning to save a fixed amount or you want to pay off a certain amount of debt every month, you’ll want to include it in your budget.

If you are planning to save, make sure that the amount is realistic. And, understand that saving money takes time.

Once you know your spending habits and how much you make, it’s easier for you to track your progress on a monthly basis.

How to Calculate the Difference?

To calculate the difference between your income and expenses:

Subtract your total expenses from your monthly income. The difference is how much you have to play with every month.

If you are using a smartphone app like Monefy or Mint, these calculations are done for you automatically. All you need is to provide the data.

Example:

  • Monthly Income: $3,000
  • Total Expenses: $2,500
  • Difference: $500

In this case, you will have $500 leftover each month after your expenses are paid. Your leftover money, or the difference between your income and expenses, is what you will use to build your monthly budget.

Don’t panic if your budget is showing your expenses are already greater than your income. You have two options to fix this:

  • Increase your income
  • Reduce your expenses

I highly recommend using a budgeting app that will help you to build the right budget and stick with it. All calculations, if you end up negative, you’ll have to find a way to lower your expenses.

Again, writing this all down requires far more work.

Using a budgeting app makes the process far more efficient. You can focus on finding areas to save money or increasing your income instead of calculating every expense and figuring out how to pay for everything.

Don’t make your budget more complicated than it needs to be.

Figure out your monthly income and expenses, and use a budgeting app like Monefy or Mint to track your progress.

How to Reduce Your Expenses?

Let’s say that your expenses end up being more than your income. In that case, you are overspending and need to make some immediate changes.

It’s a lot easier to reduce your overall expenses in most experiences than to make more money out of the blue. But still, making money online has become a lot easier these days than it used to be. So don’t count it out!

Starting a blog or any other online business is far easier than it used to be, and there are a lot of useful free resources available online.

If you’re in a situation where your expenses are higher than your income, try finding areas in your variable expenses you can reduce or cut. Look for places where you can reduce your spending without being miserable.

  • Can you eat out less?
  • Can you buy fewer new clothes??
  • Can you find more affordable entertainment options?

Reducing small expenses may not seem like it will have a big impact. However, if you continue with this habit, over time, those small expenses will add up and can really help you achieve financial success in life.

Suppose your expenses far outweigh your income, or you have significant debt. In this situation, reducing your variable expenses may not be enough.

Instead, you may need to cut back on your fixed expenses and find a way to balance out your budget and increase your income.

Here are a few ideas to reduce your expenses:

  • Save on electricity by adjusting the thermostat.
  • Eat out less or cook at home more often.
  • Don’t purchase expensive makeup, hair, and beauty products.
  • Don’t purchase expensive clothing.
  • Get rid of unwanted items and make some quick cash
  • Sell your second car if you are not using it enough.
  • Stock up on often-used items by buying bulk.
  • Buy grocery products that are on sale.
  • Take advantage of rewards and digital coupons.
  • Get rid of gym memberships if you’re not using them.
  • Reduce the number of subscription services.

These are just a few ideas to help you reduce your expenses.

If you have been spending money on things you don’t actually need, now is a good time to reconsider your spending habits.

Budgeting can give you an accurate picture of what you’re spending. You can then decide how to spend less. Budgeting just gives you the flexibility to make changes that will benefit you financially in the long run.

You’ll likely find that lowering your expenses will give you a better quality of life and the freedom to do more of what you want with your money.

You should also adjust your budget over time. Your income and expenses can change dramatically throughout your life. It’s important to check in on your budget every month or so to make sure you’re still on track.

How to Use a Zero-Based Budget?

The Zero-Based Budget is the most common form of budgeting. That’s because a zero-based budget’s purpose is to give every dollar a job to do.

It’s important to understand that your income plays the most crucial part in your budget. You should be assigning every dollar a specific job to do.

Once you understand how you spend your money, you can create a budget and start spending money in more effective ways. You can make your money work for you instead of you working for your money.

Here’s how a zero-based budget works:

Income – Expenses = $0

Take your fixed, variable, and optional expenses, and assign money towards them until your income reaches zero.

If you have money left over, then put it toward a financial goal.

For example, let’s say you make $1500 a month.

If your rent is $500 and all your expenses add up to $500, then 1000 of your dollars have a specific job. You don’t touch this money for any reason.

Now, you have $500 left of your income.

Remember, each dollar needs a specific job. You can then your money a job and put it toward one of your financial goals.

  • $100 can go to savings.
  • $100 can go to emergency funds.
  • $200 can go to paying any debt.
  • $50 can go to eating out.
  • $50 can be fun money.

You now have all $1500 accounted for the entire month.

But, let’s say that it’s your birthday and your friends want to do something special for you. You can spend $50 on having fun with your friends and that is still within the limits of what’s in your budget. If it’s going to cost more than $50, you can simply assign your dollars differently.

Instead of giving the 200 dollars the job of paying debt, change it to $150. Thus, freeing up an extra $50, giving you a total of $100 for fun money.

As long as your $150 toward debt doesn’t put you behind on payments, you’re good. You can also simply assign the dollars from eating out, savings, or emergency funds to a different job as well.

What to Do with Your Savings?

What’s the best thing to do with your savings? Well, there are a few things you can do with your savings to better your financial situation.

If you’re paying down debt, good for you. Keep going!

But if you have some extra money and want to put it toward a financial goal, here are a few ideas that you can look at:

  • Invest in your future by investing in the stock market.
  • Put your money toward buying your first home or another rental property.
  • Start that business you always wanted to start.
  • Put your money toward tuition for further education.
  • Build an emergency fund

The first thing you should do is start an emergency fund.

Start by setting a savings goal of $1,000 in your savings account. From there, build that into a three-month to a six-month emergency fund.

If you have high-interest debt, you can focus on paying that off.

Want to grow your savings even faster?

Then take some of your money and invest it. Index funds and stocks are a great way to grow your money over time. Just be sure to do your research. Lastly, you can put some of your savings toward a retirement account.

Try Other Budgeting Strategies

Make sure that you are occasionally reviewing your budgeting strategy.

Is it working for you?

Are you achieving the goals you set for yourself?

Just like any strategy, there are ways you can improve it to help you reach your goals. For example, if you have a long-term goal of buying a house, you may want to consider creating another savings account specifically for that.

You can also try other budgeting strategies such as the 50/20/30 rule, which states that you allocate your money accordingly:

  • 50% of your income goes to your needs
  • 30% of your income goes to your wants
  • 20% of your income is saved for the future

This is a great way to keep your mind distracted from that retail therapy you’re craving if you find yourself slipping.

This can help prevent shopping sprees for something unnecessary.

Now that your savings are growing, you’ll have an easier time paying off debt and accumulating wealth.

Remember, keep your spending in check and try to motivate yourself with a specific reason for setting goals. You’ll be debt-free in no time!

Keep a Buffer in Your Bank Account

This is a great way to keep yourself financially healthy.

After all, if you have no buffer in your bank account and you do not have money to pay for your necessities, this can lead to you resorting and using your credit cards again and going further into debt.

When you keep a buffer in your bank account, this will help you make sure that you can continue to pay for your necessities without having to use credit cards.

What exactly is a savings buffer?

It’s money that you keep in your account for if an emergency comes up such as an unexpected bill. For example, let’s say your water heater breaks and needs to be replaced. Instead of pulling out your credit card, you can use the money you saved in your savings buffer.

The buffer should be between three and six months’ worth of living expenses, depending on what you can comfortably afford to save.

Keep Tracking Your Expenses

When you create your budget, you can’t just set it up and leave it.

Just like any strategy, you need to regularly review your budget and make sure that it’s still working for you.

Being attentive to your budget throughout every month isn’t so hard. All you need to do is track your expenses and remain responsible.

Whenever you purchase something or pay a bill, immediately jot down the amount. At the end of the month, take a look at all your expenses and categorize them into needs and wants. It’ll help you know where your money is going. Also, you may find that you are spending more on certain categories than others.

If you’re not sure whether or not an expense is a need or want, use the rule of thumb. If it’s something that you can live without, it’s most likely want.

Budgeting isn’t too hard to do once you get the hang of it. With these easy steps, you’ll be on your way to financial freedom in no time!

If you’re using a budgeting app or software, tracking should automatically do this for you. As long as you have your accounts linked or you at least manually import your transactions, you should be able to track your expenses easily.

Ensure that you do this throughout the month.

Don’t just wait till the very end of the month to do it. If you do, your spending might just surprise you and ruin your budget.

You may wonder why it’s essential to track your expenses every month.

The answer is simple: it helps you see where your money is going.

A budge is never something that is set in stone. Situations in your life change, and your budget needs to be able to adapt to those situations. Your lifestyle and income should be able to change along with your current needs.

If you feel like you’re spending too much on certain categories, you can look into how to cut your expenses without feeling like you’re sacrificing the quality of your life.

Remember, tracking is a must.

Final Thoughts

When it comes to your money, you’re the boss. By creating a monthly budget, you’ll be fully able to manage your money successfully.

Budgeting your money will be harder in some months than others.

However, the hard work is worth it.

After all, your financial future depends on you and how responsible you are with your money. To set goals and achieve them, you need to understand your money. – by budgeting, you’ll learn about its power over time.

Every dollar in your budget is essential.

A Zero-Based-Budget is excellent for those who need to understand the value of each dollar they spend.

When you’re more comfortable, move on to other budgeting strategies.

To achieve financial success, a budget is an absolutely essential tool. With a budget, You can make your money management goals a reality.

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