The ultimate guide to budgeting: Here’s how to build yours

Budgeting is not a bad word. Yet for many, thinking about how to make a budget conjures up images of complicated, intimidating paperwork.

When you know where you stand financially and have a plan in place for your hard-earned money, your life can be a lot less stressful. And, as it happens, helping you stress less about money is a key part of credit unions’ approach to banking. Their experts work to ensure you feel comfortable with your finances.

Feeling comfortable starts with knowing where you stand, and that in turn should start with having a grasp on your budget. And if you are wondering how to make a budget, rest assured. This article has you covered with five easy tips that help break it down.

Tip 1: Get informed on your own financials

To get a sense of where you stand financially, you need to understand your net worth. It’s the combined value of your assets (home, car, cash, investments, etc.) minus your debts (student loans, line of credit, mortgage, credit cards, etc). 

Tip 2: Know what’s coming in and what’s going out

Before you can make a budget, you need to know how much money you have coming in. Then, you have to balance that against your expenses.

What’s coming in: gross vs. net income

When you get your pay stub, you should see two numbers: your gross income and your net income. Your gross income is the total amount of money you’ve earned. Your net income (often called your take-home pay) is the amount left over once taxes and other deductions are subtracted from your gross income. 

As you build your budget, be sure to build it based on your net income, as this is the actual amount of money you have to work with. You can also include other income sources like self-employment, commissions, bonuses, tips, government benefits, bursaries, and tax rebates, but be mindful that these are not guaranteed amounts.

What’s going out: tracking your expenses

Track your spending for two or three months to get a clear sense of where your money is going. Little expenses can add up quickly, so tracking your spending—including that daily latte—will give you a much clearer picture of where your money goes each month. That will help you build a solid, reasonable budget.

Tracking your expenses doesn’t have to be complicated. In fact, it’s more likely to become a habit if you choose the option that is easiest for you. Here are a few to consider:

• Use a notebook:  It’s low-tech and easy. Carrying a small notebook with you also means you can track spending on the go.
• Use an app: It’s another way to track as you go, since your phone is likely always with you. Put it to good use, and download an app that tracks your expenses. There are lots to choose from, and many are free.
• Collect your receipts: Collect and organize receipts in categories based on expense types. Optional (but recommended) next step: load their totals spent into a spreadsheet.

Tip 3: Define and set your financial goals

Once you know where you are, the question becomes: “Where do you want to be?” Maybe it’s saving for a downpayment on your first home, or a vacation somewhere sunny and warm. Maybe you want your student loan or line of credit to be a thing of the past, or are thinking ahead to retirement. 

Regardless of where you’d like to be, it’s important to set financial goals that give you something to work toward. Once you know where you’re going, you can build a budget accordingly.

Tip 4: Start building your budget

Now that you know where you are and where you’re going, it’s time to build a budget to help get you there. 

While your first budget may take some time to create, treat it like any skill you are learning for the first time. Practice makes perfect here too. And remember: the more accurate and honest you are with your budget, the better it will work. 

Organize your expenses into categories of spending. Once you’ve taken a first pass, you can adjust as needed each month to suit your life and your financial situation.

Fixed vs variable expenses

As you start to list your expenses, it’s important to know the difference between fixed versus variable expenses. Fixed expenses are set amounts that go out every month, like rent. Variable expenses are those that can change, like groceries or entertainment.

For budgeting, fixed expenses are typically easier to work with since you know exactly how much they are each month. As variable expenses can change, they can make budgeting tough (and overspending easy). Here’s the solution: turn as many variable expenses as possible into fixed ones.

Here’s how: you could set a fixed monthly budget of $250 for groceries, meaning you spend under $250 on groceries each month. By turning this variable cost into a fixed one, you can make your budgeting that much easier.

Once you’ve entered your income and expenses, you’ll see if your budget balances. A balanced budget means your income is either equal to or greater than your expenses. 

If your budget is not balanced, you’ll need to adjust and either reduce your expenses or increase your income. And if you find that you have money left over, this would be a great time to review your savings goals and start to think about investments and long-term savings.

Choose a money management system that works for you

Now that you’ve made a budget, it’s time to choose a money-management system.

Low tech (aka the envelope method): If you want to go old school, find an envelope! It may sound silly, but this tried-and-true method can be a great way to stick to your budget. 

If you’ve allotted yourself $400 per month for groceries, you withdraw $200 when you get your first pay of the month and put it in an envelope marked ‘groceries’. No money comes out unless it’s going toward groceries. Seriously: none. When you get paid again, withdraw another $200 from your paycheck and place it in the envelope. When the money runs out, don’t spend any more in that category until a new month starts.

Don’t be tempted to borrow from other envelopes. If you have money left over, that means you’ve come in under budget. And that means that you’re within your own budget. Nicely done! You can use the extra cash to boost your savings, pay down debt, or treat yourself to something special.

High tech (think software and apps): If you prefer to go paperless, there are many excellent options. The great thing about apps is they are right there on your phone, whenever you need them.

Like the envelope method, software or apps help track the money you have left to spend every month. Some can even help you set up your budget. Review your app options and choose the one that works best for you.

Congrats, you have built your budget!

Having a budget is a great first step to getting control of your finances. But that doesn’t mean you’re done. It’s important to revisit your budget to make adjustments as your needs and wants evolve. 

Your life doesn’t stand still, and neither should your budget.

Tip 5: Your budget should also plan for your future

In Tip 3, we talked about setting some financial goals for the future. Now that you have a list, it’s time to connect with a credit union expert who can help you take control of your finances, reach your goals and feel good about your financial situation. 

In short, they can help you build a financial plan for the future and answer questions like:

• Am I saving enough?
• Am I using the right account?
• Am I paying down debt fast enough? 
• What else should I be thinking about?

Getting control of your finances with a budget and plan for your future doesn’t need to be overwhelming. Especially when you have a trusted expert helping you out.