How to Create a Budget: A More Personalized Approach

A budget is one of the most effective tools for getting your financial house in order. But many people don’t know how to budget. More accurately, they don’t know how to create a budget that is sustainable.

Why is this? For one, budgets are often restrictive in nature.

I view restrictive budgeting with the same lens as restrictive dieting. It might solve an immediate problem for some. But for most people, it’s not going to be a long-term solution.

Additionally, restrictive budgets often lead people to give up when they overspend or fall off the budgeting wagon. This can reinforce the “I just suck at managing money, so what’s the point” mentality.

By taking a more personalized approach, you can create a budget that works for you. Here’s how to create a budget with six simple steps.

Before You Create a Budget

You might be tempted to jump right in and create a budget using a tool or technique you’ve found online. But there are a couple of crucial steps you need to take BEFORE you start building out your budget.

Write Down Your Financial and Personal Goals

Every great plan starts with a “why”. Why are you creating a budget? What’s going to be your intrinsic and extrinsic motivation to stick to a budget?

Start by writing down your financial and personal goals. Financial goals might include saving for a house, building an emergency fund, becoming consumer debt-free or retiring early.

These are all great goals, but it’s also important to take a deep look at your personal goals.

Personal goals might include:

  • Building a stronger relationship with your spouse or significant other.
  • Eliminating anxiety or arguments surrounding finances.
  • Creating memories with your children or loved ones.

It might not seem like it at first glance, but your individual and family goals are usually heavily influenced by your financial situation.

Here’s how to set financial goals as a family.

Track Your Current Spending and Income

You can’t cut back or set goals for your finances unless you know how much money is coming in versus how much is going out.

Don’t guess on these numbers. Instead, gather all of your income and spending information in one place. You can use a budgeting app like YNAB (You Need a Budget), an Excel spreadsheet or put pen to paper the old-fashioned way.

Pull at least three months of financial statements (e.g. bank statements, credit card bills, pay stubs, etc.) that detail all of your household income and expenses. This will allow you to see what your money is being spent on regularly.

You’ll also need to account for any irregular or seasonal spending within your budget. This might include costs associated with birthdays, spring or fall youth sports, or annual family vacations.

Go ahead and list out any expenses that will likely pop up throughout the year. This will help prevent any major surprises when you’re deep in the weeds of budgeting.

The Nitty Gritty of How to Create a Budget

Once you have those foundational pieces in place, you can create a budget customized to your priorities and values. But what does it actually look like to create a personalized budget? Here’s your next steps for how to create a budget.

Create Realistic Budgeting Categories and Amounts

When creating budgeting categories, I recommend a less is more approach. The more categories and subcategories you have, the more overwhelmed you might feel.

Start by looking at your current spending averages and irregular expenses that you previously laid out. Break your expenses into several broad categories, such as:

Fixed expenses. These are necessary expenses that won’t change too much without making some serious lifestyle adjustments. For example, this might include your mortgage or rent, car payment, medical or prescription costs, cell phone and internet bill, and childcare expenses.

Variable expenses. These are your expenses that typically fluctuate. For example, these might be costs associated with dining out, traveling, personal care, or home improvements. Generally, you’ll have more control when adjusting your discretionary spending.

Debt payments. Your living and auto expenses will be accounted for as a fixed expense, but other debt payments should fall into this category. Include your monthly payment (minimum or desired amount) for each of your credit cards, student loans and any other types of personal loans.

Savings and investment contributions. Your savings rate is the top indicator of future financial independence. Make sure you’re planning for and tracking any contributions made to your employer or personal retirement accounts. If you’re building your emergency fund or working toward another short-term savings goal, you’ll need to account for those funds each month, as well.

These broad categories will allow you to see the big picture and give you a realistic feel of where you can make significant adjustments to your spending.

Note that you can make subcategories within each of these types of expenses (most people do), but don’t go overboard. Keep it simple, so that it stays manageable.

Trim Your Spending, but Keep What’s Important to You

Now that you know exactly where your money is going, take a look at your spending to see if there’s anything you can trim back or get rid of completely.

Don’t worry about trying to fit every expense into a suggested amount you found online. Instead, compare your spending to your family priorities and values that you previously outlined.

For example, someone might look at our family budget and think, “Wow, they really need to cut back on dining out.” But we’re in a stage of life where dining out is also our way of “dating your spouse” and spending quality time as a family. This expense matches our current family values even though traditional budgeting advice would tell us to cut this expense way back.

Go through each expense and decide whether it aligns with what’s important to you. If it doesn’t, get rid of it. If it does, ask yourself if there’s a way to cut back on the cost.

When’s the last time you looked at updated rates for your cell phone or internet bill? Is there a streaming service that you don’t actually watch? Have you asked for any appropriate profession-based discounts on any and all services, such as a military or first responder discount? Maybe your health insurance offers discounted gym partnerships you aren’t aware of.

Keep any expenses that bring you joy but still look for ways to cut costs.

Choose a Budgeting Plan or System that Speaks to You

Since you’ve worked through all aspects of your income and expenses and aligned them with your priorities and values, you’re now ready to create your budget.

You can choose a popular budgeting system like zero-based budgeting, the cash envelope system, or use a percentage approach (e.g. 50/30/20 budget). You can also choose to budget monthly, bi-weekly or by paycheck.

There are a lot of options out there, so you need to find a system and plan that resonates with you.

Change Your Approach if Needed

Your budget should be a guide. It should ebb and flow with the seasons of your life, and it should absolutely change if it’s no longer working for you.

Remember, a budget should make your life easier. It shouldn’t cause more stress, anxiety, or arguments. If it does, PIVOT (Friends reference – use your best Ross voice) and change your approach.

Budgeting is all about trial and error. It usually takes a few months to figure out what type of budget fits your needs and personal style. Once you’ve nailed down what works for you, it might take a few additional months to really dial in your spending versus your income.

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