How to Create a Realistic Budget that Works

Do you ever feel like your finances are out of control? Does it seem like there’s never enough money to cover all your expenses and still have some left over? Many people struggle to manage their money effectively. But creating a realistic budget can help you finally get a handle on your finances.

When you budget, you proactively plan where your money needs to go each month. This prevents overspending so you can achieve your financial goals. Budgeting gives you control over your money rather than your money controlling you.

In this comprehensive guide, you’ll learn steps for building a realistic budget that actually works. Follow along to start taking control of your finances today.

Key Takeaways

Budgeting helps you plan where your money goes each month
Calculate your net income from all sources
Identify fixed and variable expenses
Pick a budget method like 50/30/20 or zero-based
Use tools to track spending and adjust as needed
Stick to your budget by avoiding impulse purchases
Review and tweak your budget regularly

Why Budgeting Matters

Creating a budget is one of the most important things you can do for your finances. Budgeting has many powerful benefits:

Take Control of Your Finances

First and foremost, a budget gives you control over where your money goes. Without a plan, it’s easy to overspend frivolously. You may end up wondering where all your money went by the end of the month.

Budgeting lets you take intentional control of your finances. You decide how to allocate your money across different expenses, savings, and financial goals.

Reduce Stress About Money

Do you ever lay awake at night worrying about money? Creating a realistic budget can help relieve financial stress.

When you budget, you make sure your essential expenses are covered. You identify areas to cut back discretionary spending. And you direct money toward your goals. This leads to less financial anxiety month-to-month.

Achieve Financial Goals

It’s extremely difficult to make progress toward financial goals without a budget.

Budgeting identifies opportunities for you to build savings and make extra debt payments. This enables you to achieve short-term goals like building an emergency fund. And long-term goals like saving for retirement or your child’s college education.

Now that you know why budgeting matters, let’s explore how to actually create a realistic budget that meets your needs.

Know Where Your Money Goes

Before building your budget, it helps to know how you currently spend your money. This allows you to identify areas for improvement in your spending habits.

There are a few steps to understand your spending patterns:

Track Spending

The first step is to track your expenses for at least a month. This gives you visibility into how much you spend in each area.

There are a few ways to track spending:

Review bank and credit card statements
Use expense tracking apps
Manually record purchases in a spreadsheet

Make sure to categorize each of your purchases so you can break down spending. Common categories include groceries, dining out, entertainment, utilities, etc.

Analyze Spending Habits

Once you’ve tracked expenses for a full month, analyze the data you collected.

Which categories do you spend the most money in? Are there areas where you tend to overspend each month? How much are you able to save?

Your spending analysis will illuminate your habits so far and identify opportunities to adjust.

Identify Needs vs. Wants

As you analyze spending, it’s helpful to classify expenses as “needs” or “wants.”

Needs are essential expenses required for survival and maintaining your lifestyle. For example, housing, utilities, food, transportation, insurance, minimum debt payments, etc.

Wants are optional expenses that are nice to have but not essential. These include dining out, entertainment, hobbies, new gadgets, etc.

Distinguishing needs and wants allows you to make intentional spending trade-offs when building your budget.

Now that you’ve done the groundwork to understand your spending, you’re ready to calculate your income.

Calculate Your Income

The first step in creating any budget is to determine your overall income. Be sure to calculate your net income – the amount left after taxes and other deductions.

Here are some tips for tallying up your total monthly income:

Tally Up Income Sources

Make a list of any sources of income you receive on a regular monthly basis:

Employment income
Side business income
Investment income
Government benefits
Any other monthly income

Add up the totals from each source to determine your gross monthly income.

Account for Fluctuations

Some income sources may fluctuate month-to-month. For example, income from:

Commission-based jobs
Seasonal work
Irregular freelance jobs

Look at your income over the past 3-6 months to estimate an average monthly amount from fluctuating sources.

Estimate Your Average Monthly

Once you’ve tallied your income sources, subtract taxes and other deductions to determine your average monthly income.

This net income number is your total monthly amount available to save and spend.

Now it’s time to break down how you’ll allocate your monthly income through budgeting.

Build Your Budget

Building your budget involves categorizing expenses and allocating money to each category. Here are some tips for constructing your budget:

List Fixed Expenses

First make a list of all your fixed expenses. These are expenses that stay the same each month, such as:

Housing payment
Loan payments
Insurance premiums
Gym memberships
Subscriptions
Minimum debt payments

Look back at your spending history over the past few months to determine fixed amounts.

Estimate Variable Costs

Next, identify your variable expenses. These are costs that fluctuate month-to-month, like:

Groceries
Gasoline
Utilities
Entertainment
Dining out

Determine an average monthly cost for each variable expense based on previous spending.

Allow Room for Irregular Expenses

Don’t forget to account for irregular expenses that don’t occur monthly:

Annual insurance premiums
Car registration and maintenance
Medical expenses
Home repairs
Holiday gifts
Vacations

Estimate monthly amounts for these based on yearly totals.

Budget for Financial Priorities

When determining budget amounts, make sure to allocate money for financial priorities like:

Emergency fund savings
Debt repayment
Retirement savings
Any other financial goals

Ideally, these priorities should be funded before any discretionary spending.

Once you’ve built your budget, the next step is choosing a budgeting method to keep yourself on track.

Choose a Budgeting Method

There are a few different budgeting methods out there. Pick the one that fits best with your preferences and financial style.

Here are three budgeting methods to consider:

Percentage-Based Budget

With this method, you assign percentages of your net income to different spending categories:

50% to fixed needs like housing and bills
30% to variable expenses like food and entertainment
20% to savings and debt repayment

The percentages can be adjusted as needed. The key is ensuring part of your income goes to financial priorities.

Zero-Sum Budget

A zero-sum budget accounts for every single dollar of your net income. You assign each dollar a purpose like:

Housing
Groceries
Gas
Entertainment
Emergency savings
Etc.

At the end of budgeting, your income minus expenses should equal zero. It’s a very detailed approach.

Line-Item Budget

This approach budgets at a category level vs. dollar level. It works as follows:

List budget categories like Housing, Utilities, Food, etc.
Determine fixed amounts to budget for each category monthly.
Make sure total expenses align with total income.

The line-item approach provides flexibility within categories.

Choose the method that fits your needs and seems sustainable long-term.

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Use Tools to Stay on Track

To stick with your budget, it helps to have tools that make tracking your spending easy. Here are some options:

Spreadsheets

Budget spreadsheets help allocate spending by category and give you an overview of your finances. Whether you build your own or use a template, update the sheet monthly.

Budgeting Apps

Budgeting apps like Mint, YNAB, and EveryDollar automatically connect to your bank accounts. They track and categorize transactions, so you know where your money goes.

Expense Trackers

Expense trackers help log your purchases as they happen so you don’t overspend. You can track in a mobile app or notebook.

Use tools that fit your lifestyle and make budgeting easier, not more complicated.

Adjust as Needed

Your budget is not meant to be set in stone. You’ll need to make adjustments to your budget over time for it to remain realistic.

Here are some tips for adjusting your budget:

Review Monthly Spending

Do a monthly review of actual spending versus your budgeted amounts for each category. Identify areas where real spending was much higher or lower than budgeted.

Tweak Categories

Based on your review, determine categories you may need to increase or decrease budget amounts for. Adjust your spreadsheet or budgeting app accordingly.

Account for Changing Needs

If life changes like a new family member or job occur, modify your budget to account for changing needs. Be prepared to make some trade-offs.

The key is to revisit your budget monthly and tweak as needed so it remains an accurate reflection of your financial life.

Stick to Your Budget

Creating a budget is only the first step – you also have to stick to it. Here are some tips to stay on track:

Avoid Impulse Purchases

Before buying anything, check if it fits into your budget category amounts for the month. Stick to planned purchases to avoid impulse buys.

Hold Yourself Accountable

Share your budget with someone you trust or join an online community. Accountability partners help motivate you to stick to your plan.

Celebrate Small Wins

When you meet budget goals like spending less than budgeted in a category, celebrate your win. Small victories keep you motivated.

Staying on budget takes discipline, but gets easier over time as you form new money habits.

Conclusion

Creating a realistic budget takes effort, but pays major dividends for your financial life. When you budget intentionally each month, you directly impact your ability to manage debt, build savings, and achieve goals.

The keys are calculating your full income, identifying all expenses, picking a system that fits your lifestyle, and tracking spending consistently. Adjust and tweak your budget as life changes happen. Building the budget is just step one – stick to it going forward.

Take control of your money before it controls you. Follow this guide to create a budget that works! What budgeting tips work for you? Share in the comments to help others!

Frequently Asked Questions

How detailed should my budget be?

Your budget should break expenses into enough categories to account for all your spending. Many budgets have 10-15 categories. Too many can get overwhelming.

Can I adjust my budget mid-month?

Absolutely! Adjust your budget anytime unexpected expenses come up. Just try to stick close to your original plan.

What if I go over my budget?

Don’t panic or get down on yourself. Record the overspending, then decide where to reduce other expenses to compensate. Learn for next month.

When should I create a new budget?

Update your budget at the start of each month. Tweak categories and amounts as needed. This keeps your plan current.

How do I budget for irregular expenses?

If you have quarterly, biannual, or annual expenses, determine the yearly total and divide by 12. Set aside that monthly average.

Disclaimer: The information provided in this blog post is for general informational and inspirational purposes only. We’re sharing this information to offer ideas, tips and motivation for starting a business, but this should not be considered professional advice. Starting a business is complex with many moving parts, and what works for one aspiring entrepreneur may not work for another. Before taking any action, please consult with legal, financial, tax and other relevant professionals to determine the best steps to take for your own specific circumstances. The financial estimates, costs, revenues, timelines etc. mentioned in this post are approximate numbers gathered at the time of researching & publishing this post and are subject to change. We do not guarantee any specific financial or other results/outcomes.