Creating a budget
Design a personal budget in six steps.
Whether you’re looking to create a personal budget spreadsheet or just get a better grasp on money management, start with these six steps.
Whether or not you use a budget spreadsheet, you probably need some way of determining where your money is going each month. Creating a budget with a template can help you feel more in control of your finances and let you save money for your goals. The trick is to figure out a way to track your finances that works for you. The following steps can help you create a budget.
Step 1: Note your net income
The first step in creating a budget is to identify the amount of money you have coming in. Keep in mind, however, that it’s easy to overestimate what you can afford if you think of your total salary as what you have to spend. Remember to subtract your deductions for Social Security, taxes, 401(k) and flexible spending account allocations when creating a budget worksheet. Your final take-home pay is called net income, and that is the number you should use when creating a budget.
Tip: If you have a hobby or a talent, you may be able to find a way to supplement your income. Having an extra source of income can also be helpful if you ever lose your job.
Step 2: Track your spending
It’s helpful to keep track of and categorize your spending so you know where you can make adjustments. Doing so will help you identify what you are spending the most money on and where it might be easiest to cut back.
Begin by listing all your fixed expenses. These are regular monthly bills such as rent or mortgage, utilities or car payments. It’s unlikely you’ll be able to cut back on these, but knowing how much of your monthly income they take up can be helpful.
Next list all your variable expenses—those that may change from month to month such as groceries, gas and entertainment. This is an area where you might find opportunities to cut back. Credit card and bank statements are a good place to start since they often itemize or categorize your monthly expenditures.
Tip: Record your daily spending with anything that’s handy—a pen and paper, an app or your smartphone.
Step 3: Set your goals
Before you start sifting through the information you’ve tracked, make a list of all the financial goals you want to accomplish in the short- and long-term. Short-term goals should take no longer than a year to achieve. Long-term goals, such as saving for retirement or your child’s education, may take years to reach. Remember, your goals don’t have to be set in stone, but identifying your priorities before you start planning a budget will help. For example, it may be easier to cut spending if you know your short-term goal is to reduce credit card debt.
Step 4: Make a plan
Use the variable and fixed expenses you compiled to help you get a sense of what you’ll spend in the coming months. With your fixed expenses, you can predict fairly accurately how much you’ll have to budget for. Use your past spending habits as a guide when trying to predict your variable expenses.
You might choose to break down your expenses even further, between things you need to have and things you want to have. For instance, if you drive to work every day, gasoline probably counts as a need. A monthly music subscription, however, may count as a want. This difference becomes important when it’s time to make adjustments.
Step 5: Adjust your habits if necessary
Once you’ve done all this, you have what you need to complete your budget. Having documented your income and spending, you can start to see where you have money left over or where you can cut back so that you have money to put toward your goals.
Want-to-have expenses are the first area to look for spending cuts. Can you skip movie night in favor of a movie at home? Try adjusting the numbers you’ve tracked to see how much money that frees up. If you’ve already adjusted your spending on wants, evaluate your spending on needs. You may need internet at home, but do you need the fastest available?
Lastly, if the numbers still aren’t adding up, you can look at adjusting your fixed expenses. Doing so will be much more difficult and require greater discipline, but on close inspection a “need” may just be a “hard to part with.” Such decisions come with big trade-offs, so make sure you carefully weigh your options.
Tip: Small savings can add up to a lot of money, so don’t overlook the little stuff. You might be surprised at how much extra money you accumulate by making one minor adjustment at a time.
Step 6: Keep checking in
It’s important that you review your budget on a regular basis to be sure you are staying on track. Few elements of your budget are set in stone: You may get a raise, your expenses may increase or you may have reached your goal and want to plan for a new one. Whatever the reason, keep checking in with your budget following the steps above.
The material provided on this website is for informational use only and is not intended for financial or investment advice. Khan Academy assumes no liability for any loss or damage resulting from one’s reliance on the material provided. Please also note that such material is not updated regularly and that some of the information may not therefore be current. Consult with your own financial professional when making decisions regarding your financial or investment options. Khan Academy doesn’t provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.
Want to join the conversation?
- Would it be good to start saving now as a 16 year old?(59 votes)
- Yes! If you start a habit now of putting aside between 10-15% of your paychecks in a savings account you never touch, it will add up fast and you'll have an easier time saving money when you're older.(57 votes)
- Does my financial status make me who I am?(6 votes)
- No...your "worth" as a human being cannot be quantified this way. Who you truly are is defined by your values and beliefs, what you think is important, how you treat others, and the impact you make on your little corner of the world. Money is nice, and necessary, but don't fall into the trap of believing that you "are your bank account." One can be "rich" in many ways besides just money....think health, friendships, family, opportunities, et cetera.(37 votes)
- I'm a 14 year old homeschooled girl who lives in the country,where there isn't really anything that I can to do to gain income. What are some things I can do to earn money before I move out?(10 votes)
- if you have internet you can sell stuff on the internet. what talent do you have? what is your passion? Yard work, babysitting, dog walking, helping the elderly, help out on a farm. Art, quilting, furniture, do things other can't or don't have time for. if you know more than one langue- translate or teach.(17 votes)
- I need to start to show my mom its possible to Save!(8 votes)
- Would it be OK to put all of my spending money into my needs instead of wants.(2 votes)
- That would depend considerably on what you consider to be needs vs wants. Some people can handle living in a vehicle in order to save money, most people can't. Depending on your goals college may be a need rather than a want. All restaurant food is technically a want compared to the need of eating when things can be cooked at home. It's mostly about striking a balance that you can live with that doesn't create issues with money, stress or problems with time management. I really want a dishwasher, but the last time we moved it didn't matter enough to keep us from getting the apartment we got.(2 votes)
- how can you mange money in the best way when you have a child on the way, trying to get an apartment, and still only in highschool?(1 vote)
- Have you watched the video "Easy tips to save money every day - by Better Money Habits" yet? It has some good tips. Add to that: local resources. 1. Does your public library have DVDs to loan and internet you can use for free? This can cut down on entertainment/monthly expenses. Does your area have "gently used" resale shops where you can purchase items for less than at regular retail shops? In my area, there are brand new (tags still one them) items in "gently used" shops. Sometimes churches will have these types of shops, sometimes there are Goodwill, or other local-only shops with limited hours but worth finding for the money they'll save you.(3 votes)
- If i'm spending too much money i could use the envolpe method to catgorize my money more easily.(2 votes)
- why do they make the viodeos 4(1 vote)
- i have a savings account that my aprents strted when i was little is there a way i can take out of it at 18 instead of 21 ?(1 vote)
- Thats a conversation you need to have with your parents.(1 vote)
- What is the best way to start saving to make the most of your financial situation?(1 vote)