If you don't have a budget yet, you're not alone. According to a Gallup poll, only 32 percent of Americans have a monthly budget and only 30 percent have a long-term financial plan1. But a budget can be a useful tools for getting a handle on your spending and preparing for the future.
Here are the five steps that may be able to help you build your budget:
1. Think about your long- and short-term goals:
Before you start making your budget, think about your financial situation. Do you want to pay down debt? Are you saving for a home, new baby, car, or big trip? Do you want to build an emergency fund? Do you know how much you should be saving to retire comfortably? The answers to these questions can help form part of the framework for your budget.
2. Figure out how much money you have coming in:
List all your regular sources of income, including your take home pay, tips, and other income like alimony and child support. Keep in mind, your take home pay is the amount of money you're paid minus the taxes that are withheld and any other deductions like health insurance premiums or deposits into flexible spending accounts.
3. Add up your regular monthly expenses.
There are certain expenses that you pay every month—rent or mortgage, utilities, cable and cell phone service, transportation and parking, insurance, loans, and credit card payments. Make a list of all these expenses and add them up.
4. Subtract your monthly expenses from your income.
The amount that's left is what you use to pay for your other expenses like groceries, entertainment, eating out, and clothing. You may also consider setting aside some of this money as savings to build an emergency fund. You can have a set amount deducted from each paycheck and go directly to a savings account. If you're planning a big purchase, you can save some of this money towards that goal. If you're working to pay down debt, you can use a portion of the money to pay more than your minimum amount due.
5. Look for ways to cut your expenses.
Now that you know how much money you have and how you're spending it, consider looking for ways to lower your expenses and save more. You may be surprised how easy it is to spend less. Bringing your lunch to work several times a week can save you $20 or more a week. Cutting down on eating out or take out can also add up to significant savings. Another way to spend less is to wait a week to buy the things you want but don't necessarily need. This strategy can help you make fewer impulse purchases.
Now that you've got your budget built, remember to give it a checkup at least once a year to make sure it's still the right approach for your current financial situation.