You wouldn't pack for a trip without checking the weather and you wouldn't leave on a cross country journey without a map or smartphone. Why would you set off on your adult life without a budget?
A budget will help to keep your spending habits in check and help prevent you from living outside of your means. Like many things in life, planning is just the first step. Making your budget won't be difficult, staying committed to it will be.
Budgeting is the process of looking at your net monthly income (after you pay taxes) and your monthly expenses. The goal is to subtract the expenses from the income and have some money left over, or, at the very least, not be negative.
Budgets don't have to be fancy. You can use an Excel spreadsheet or a piece of paper. If you decide to create your own template, be sure to create categories for everything you spend money on in a month. You can be as detailed as you want or list general categories. For example, you could include all bills under a "Bills" category or list each bill separately. Personally, I list everything separately to have a better idea of where each dollar goes.
With your template complete, it's time to create your budget.
Step 1: Add up your income
Figure out all of your sources of income during a month. This could be a job where you get paid a salary or by the hour, money sent by family or a partner's income. Be sure when you are recording a paycheck you look at the net amount. The net pay will already have taxes deducted whereas the gross pay has not yet had taxes removed. If you use the gross pay you risk overstating how much you really have.
Step 2: Add up your expenses
Your expenses will most likely be either fixed or variable. Fixed expenses are the same each month and include things like rent, insurance, and an auto loan payment.
Your variable expenses will change each month. For example, this could be your food and entertainment cost. If you eat out a lot in one month your expense will be higher than a month where you don't eat out at all.
In a later section we will discuss an emergency fund and why you need one. It's worth mentioning here that you should view your emergency fund as a fixed expense each month that you must pay, just like you have to pay rent.
Step 3: Do the math
The final step is super easy, especially if you are using Excel. Simply take your total income for the month and subtract out your total expenses. You will be faced with a number that is either positive or negative. If it's positive then you are living within your means and should be happy. If the number is negative, don't be discouraged. Go back to your expenses and see where you could cut back. For many people, the food and entertainment section is usually a good place to look to reduce expenses.
Once you have created your budget, periodically check your spending to be sure you are staying on track. If you have a change in income you will need to go back and revise your budget. The same is true if you take on any new debt that requires monthly payments.