Personal Budgeting Basics: Step-by-Step Guide to Starting a Budget

It used to be that most Americans lived paycheck to paycheck, but even today, many Americans see that as a goal. Clearly, many are struggling to keep up with the rising costs of housing, groceries, childcare and car payments, not to mention education, clothing and all of the small things that go along with raising a family.  

That means it’s never been more important to learn how to start a budget and save money as early as possible. Budgeting is an essential skill, and a personal budget can go a long way toward helping you and your family keep your financial head above water, save money and succeed. Here’s where to start. 

How to Make a Monthly Budget  

The best way to start is by making a monthly budget. Some people try to start by creating weekly budgets, but this tends to fail. The time period is short, forcing people to reassess their budget every week. Weekly budgeters often fall behind. 

Moreover, most people get paid on a monthly or semi-monthly basis, and most bills come in a monthly or semi-monthly basis, so a monthly budget tends to make the most sense. That means monthly budgeting sessions are easier to manage, and they tend to provide a more balanced, clear view of where your money is going. 

Budgeting Basics Step 1: Determine Your Income

Start your budget by determining your monthly after-tax income. You’ll do this by adding up all of your net income from all sources, including jobs, side gigs, investments and any other sources of income.  

If any of your income is earned without taxes already withheld (for instance, if you earn freelance income), you should account for the self-employment taxes you’ll eventually need to pay when you determine your monthly income. For example, you may take home $3,250 after taxes from your primary job. Then you may also earn $1,000 a month in untaxed side work. 

First, deduct for taxes from the side work to the extra income — let’s use 25% as an example, but consult your tax professional for their advice — and then add it to your taxed income. In this example, your total income would be $750 + $3,250 = $4,000. (Then set aside the $250 you deducted so you can pay those taxes later!) 

For the sake of simplicity, we’re discussing an individual income, but if you’re married, you’ll want to account for your partner’s income as well. 

Budgeting Basics Step 2: List Your Expenses

Now that you’ve established your total income, you’ll need to come up with a complete list of expenses for the month. You’ll want to include everything you plan to spend money on. Here are some of the categories that you might include: 

• Rent or mortgage
• Electricity, gas and internet bills
• Groceries
• Childcare and tuition
• Commuting expenses
• Car payment
• Student loan payments
• Medical and hospital bills
• Insurance (car, renters, home, etc.)
• Home or car repairs
• Phone bill
• Streaming services and cable television
• Entertainment and dining out
• Donations and charitable giving
• Gifts and holidays
• Retirement
• Emergency savings

Keep in mind that every person is different, and so are their monthly expenses. When creating a monthly budget, try to account for as many expenses as possible from month to month. 

You may have to pay an HOA fee, buy your kid's sports gear or pay for continuing education to maintain a professional certification. Do your best to leave room in your budget for unexpected expenses that may arise throughout the month. 

It’s a good idea to open a savings account and set up a way to automatically put money away for unexpected expenses, so that they don’t derail your monthly budget.

Budgeting Basics Step 3: Assign Income to Expenses 

Making a monthly budget is all about making choices. You’ll need to determine which expenses are necessary and which are optional. 

Consider trying the 50-20-30 budget rule. In this budgeting method, 50% of your income goes toward needs (like rent or mortgage), 30% toward your wants (like cable TV) and 20% to savings or debts. Go down your list and assign values to each expense. When you’re finished, there shouldn’t be any money left — your whole income should be assigned to expenses, savings or financial goals. 

Making these decisions can be difficult. How much rent can you afford? How much money should you put toward retirement? The following are budgeting guidelines for a healthy bottom line: 

• Work to build an emergency fund that could cover your expenses for three to six months.
• Focus on eliminating debt, starting first with the loans with the highest interest rates.
• Ideally, your rent or mortgage payment should equal 25–30% of your income, though this may fluctuate depending on where you live. 
• If you don’t own a home but you’d like to, you may want to work toward saving for a down payment.
• Aim to save 15% of your income for retirement.

Your budget should be about accomplishing your financial goals, and these guidelines help with some of the biggest goals people typically have: getting out of debt, owning a home and saving for retirement.  

If your budget isn’t allowing you to accomplish your goals as fast as you would like — or at all — you may need to make changes. You might just need to cut down on how often you eat out or go on vacation, but perhaps you might need to downsize your house or car. 

Don’t know which financial goals to work toward first? Reach out to Farm Bureau for advice. 

Budgeting Basics Step 4: Track Your Expenses 

As the month progresses, keep track of your actual expenses and make sure they align with the budget estimates you laid out at the beginning of the month. 

Budgeting apps make it easy to track your expenses. There are numerous free budgeting tools online, but you can also create a simple budget spreadsheet. If you’d like to keep your budget at your fingertips, check out these budgeting apps: 

• You Need a Budget: Budgeting app with bank syncing, progress reports and alerts when you overspend. There’s a free trial for 34 days and then costs $14.99 a month.
• Copilot Money: Budgeting app that syncs to your bank and allows you to track spending, budgets, investments and net worth. It’s free for a month, then costs $19.99 per month.
• Rocket Money: This app will not just track your spending and help you budget but also helps you identify subscriptions and cancel or negotiate lower rates on the ones you don’t want to pay for anymore. There’s a free plan and a premium plan.

Budgeting Basics Step 5: Improve Your Monthly Budget 

Starting a budget means learning how to live within your means. Your first few months could be difficult if you’ve never used a budget before. You may forget to add expenses or purchases to your budget tracker. Don’t give up! With practice and persistence, it will become second nature to track your spending and you’ll be able to better forecast your expenses. 

Personal Budgeting FAQs 

What Do I Do if My Income Changes Every Month? 

The best way to handle this situation is to budget for your expected minimum pay. So, if your income ranges from $3,000 to $5,000 a month, you’ll want to set up your budget for an income of $3,000. This will reduce your risk so you don’t run out of money. During your months when you make more money, you can put more toward your mortgage, retirement, savings or debt repayment. 

What Do I Do for Expenses That Fluctuate Each Month? 

Sometimes an expense (like your electric bill or gas) will change from month to month. There are a couple of ways to handle this. 

The first is to plan for the worst. If you think the most you could spend on gas in a month is $100, then budget for that. At the end of the month, if you’ve driven less than you thought you would, you’ll have the extra money left to go toward your goals. 

Your second option is to pay the previous month’s bill during the current month. Imagine you’re planning your budget for October, and you need to add a line item for electricity. It’s likely that your September bill won’t be due until sometime in the first week of October. 

So, don’t guess at what October electricity will cost you; put the September bill into the October budget since that is when you will pay it. Although it fluctuates each month, you’ll know the exact amount you need to add to the budget. 

How Do I Budget for Larger Expenses?

With practice, budgeting becomes second nature and larger expenses become easier to manage. If a large, unexpected expense comes up — for example, you need to replace your air conditioner — you can tap into your savings account to cover the cost. If you make saving a priority, you will have funds to cover emergencies when they arise. 

If you own your home, it’s always a good idea to have a separate savings account for major household expenses like this. You might also consider insuring for these instances with Residential Equipment Breakdown coverage, which covers you in the event of a mechanical failure or electrical breakdown. 

Of course, sometimes you can anticipate these major expenses. Plan ahead for vacations and other major purchases. If you want to take a vacation and estimate it’s going to cost $2,000, you can start to factor savings goals into your budget many months ahead. Add a line item for the vacation and start putting money away each month: $500 a month will have you ready in four months, $1,000 in two. If you start a year ahead, you only have to save $167 a month! 

The same principle applies when you budget for a wedding, a house or a new car. No matter what it is, you can prepare ahead of time — most expenses aren’t a surprise. If you have 200,000 miles on a car from 2010, you’re probably going to need to budget to replace it soon. Start saving money each month so you can be prepared when the time comes. 

Determine Your Financial Goals

We can help you reach your goals! Contact Farm Bureau today.