How to Create a Budget that Works

Managing your money is the first step in building wealth and developing a personal financial system that works for you. However, where do you start in managing your money and how do you make the first step? It begins with creating a budget that works for you and gives you a chance to take real control of your money starting today. In this post, you will learn the foolproof way to create a budget that will make you put together a plan of action to save money and grow your net worth.

What is a Budget?

A budget is a system or plan that helps you to track your income and expenses which will allow you to better understand how your money flows and can help you manage your money to achieve your financial goals. A budget is a very powerful tool as it will give you a great overview of your money situation which will help you to make wise financial decisions.

Additionally, after organizing your finances which we cover extensively in this blog post, making a budget and sticking to it is the next step in managing your money. It is VERY important to note here that sticking to a budget is crucial to your success and as you start to see the results, you will realize that it is a tool that can have real impact on your financial situation.

How to Create a Budget that Actually Works – Step by Step Guide

Step One

Find out how much money you make after tax each month from your job and from other sources of income you may have

Step Two

Track your expenses to see how and where you spend your money each month. Write out all your fixed expenses like your mortgage, rent, car insurance, loans etc. Also track your variable expenses (the ones that change every month) like food, utility bills etc

Step Three

Develop a system of categorizing these expenses and assign a category for each expense. Also determine how much you want to spend for each category

Step Four

Calculate how much you have each month after you have paid your bills, if there’s money left over, open a high interest savings account and start to save this amount for a rainy day. This will give you some time to start mapping out a financial goal you can use the money for.

If there’s nothing left over and you are actually spending more money than you make, look at your expenses and identify where you can make cuts. It is also an opportunity for you to start to consider a side hustle that can help you bring in extra income per month. There are many interesting ways to make more money to supplement your income and gain new skills as well.

Congratulations! You now have a system in place to make a budget, but there are other ways in which you understand how to allocate your money per month to your different expenses. One of the best framework to use is the 50-30-20 budget rule which can prove to be very effective in helping you make a decision around framing your expenses and income.

What is the 50-30-20 Budget Rule?

The 50-30-20 rule is an approach that states that you should divide your income into the following areas:

• 50% for essentials: these are your necessities and they include rent, utilities, groceries, healthcare
• 20% for meeting your financial goals: these include saving money for an emergency fund, money for investing, paying down debt and funding your retirement
• 30% for flexible spending: these include eating out, vacations, entertainment and other expenditures like buying a good book that will edify you or donating to a charity or paying tithe at your local religious organization

“There are many benefits that you can gain from making and following a budget and as you become consistent, you will find how the results of budgeting actually lead to improvements all around your financial life.”

Abundance of Jo

The Benefits of Making a Budget

There are many benefits that you can gain from making and following a budget and as you become consistent, you will find how the results of budgeting actually lead to improvements all around your financial life. Some of the benefits include:

• Getting clarity on where you spend your money. You get a 360 degree view of how your money is coming and going which will enable you to take serious action where you see you are wasting money (like on too much take-out and unnecessary subscriptions – looking at you Netflix!😊)
• You get to actually see your income to expenditure ratio, this will let you know if you are spending above your means or living within your means
• With a budget, you are able to see if you have enough to meet your basic needs like food, clothing, shelter and how much money goes toward these areas
• It will help you understand how to find money to do things that can help you achieve your financial goals like saving money, paying down debt and planning for asset building activities like buying a house or starting a business
• A budget will allow you to create a plan of action to tackle fun activities like going on vacation, or buying yourself a nice pair of shoes because you have a system to pay for these things without worrying about meeting your obligations like bills etc.
• You are able to save more money and start investing

These are all great benefits you can gain when you learn how to create a budget that actually works that can put you on track to financial success.

Conclusion and Important Advice on Creating a Budget

Learning how to budget your money is a critical step in achieving your financial goals and can have a powerful impact on how you make sense of your money. However, learning how to make a budget is simply not enough, you need to make a commitment to follow the budget and use it as a tool to improve your financial life. The goal is for you to be empowered to make the right financial choices around how you spend your money so that you can be see real change in your money life.

Money management requires focus but it always pays off and in using these steps to create a budget and sticking to it, you will be in a much better financial position. If you love this content, join our mailing list below and get a FREE copy of our Money Guide that will walk you through budgeting and get access to our newsletter that provides real tips on growing your money and making more money.

Sound off in the comments, how do you think a budget will change your financial life?