Alright, let’s talk about budgeting. I know, it might not sound like the most exciting topic, but trust me, it’s one of the best things you can do for your finances. Imagine being in control of your money instead of letting it control you.
When you have a budget, you’re not just guessing where your money goes each month—you’re making intentional choices about where it should go. Whether you’re trying to save for a vacation, pay off debt, or just avoid that “wait, where did all my money go?” feeling at the end of the month, budgeting is the secret weapon that makes it all possible.
In this post, I’m going to break it down for you, step by step, so you can start budgeting like a pro, with no stress involved.
Ready? Let’s dig in!
Step 1: Calculate Your Monthly Income
To get started with budgeting, the first thing you need to do is calculate your monthly income. This is the money that comes into your bank account regularly. It might seem straightforward if you’re on a salary, but what if your income changes each month? Whether you get paid weekly, bi-weekly, or monthly, or whether you have a side hustle, it’s important to know exactly what you’re working with.
For Salaried Employees
If you have a set salary, this one’s easy! You already know how much you make every month, right? But here’s the kicker: You should always use your net income—that’s the amount you take home after taxes and other deductions, not your gross salary (the amount before taxes). This is the real number you can spend or save.
For example, if your gross salary is $4,000 a month, but after taxes and other deductions (like health insurance and retirement contributions), you take home $3,200, then $3,200 is your monthly income.
For Freelancers and Gig Workers
If you’re a freelancer or you have an income that varies month to month, things can get trickier. But don’t worry, you’ve got this! The key here is to look at the average income you make. Take the last 3 to 6 months and find the average of your earnings. That’s your best estimate for your monthly income.
Let’s say you earned $2,000 one month, $3,500 the next, and $4,000 the month after that. Your total income for three months is $9,500, and when you divide that by 3, you get an average of $3,167 per month. This will give you a solid starting point for budgeting.
For Business Owners
Running your own business? You’ll need to take a closer look at your total revenue and subtract any business expenses to get your income. If you pay yourself a salary, great! If not, figure out how much you typically take out of the business to cover your personal needs and use that amount for budgeting.
Keep in mind that if you’re in a seasonal business or one where income fluctuates, you’ll want to use a similar method to what freelancers do—averaging your income over a few months or even a year.
Step 2: Don’t Forget Other Income Sources
While your main job or business income is likely your largest source of money, you might have other income streams you need to consider when calculating your total monthly income. These could include:
- Passive income: This might be rental income, dividends from investments, or interest from savings.
- Side hustles: Maybe you babysit, drive for Uber, or sell handmade goods online. Don’t leave that extra cash out of the equation!
- Child support, alimony, or government benefits: If you receive these regularly, they count too.
Add up all these sources, and make sure to factor them into your total monthly income.
Step 3: What About Irregular Income?
Maybe you’re a freelancer, contractor, or business owner with some months that are big earners and others that are on the slower side. If your income fluctuates, how do you budget? Great question!
Here’s a strategy to make sure you’re covered even on your low-income months:
- Use your lowest monthly income: When you’re budgeting for the month, use the lowest amount you’ve made in the last few months. This helps to make sure you won’t be caught off guard if your income dips. Once you’ve saved up some buffer savings (more on that later), you can start budgeting for those higher-income months.
- Save for lean months: When you earn more than expected, put that extra income into savings. It acts like a cushion for those months when your income is lower than usual.
Step 4: Track Your Income Regularly
Once you’ve figured out your income, it’s essential to track it regularly. Things change—maybe you get a raise, land a new contract, or pick up an extra gig. You’ll want to adjust your budget as your income grows or shrinks.
Some quick ways to keep tabs on your income:
- Use a budgeting app: Apps like Mint, YNAB (You Need a Budget), or PocketGuard can sync with your bank account and track your income automatically.
- Manual tracking: If you prefer a hands-on approach, you can use a simple spreadsheet to log your income each month. Excel or Google Sheets have budgeting templates that can help you do this.
Step 5: Plan for Taxes
If you’re self-employed or earning income that isn’t automatically taxed (like freelancing or running a side hustle), don’t forget to set aside money for taxes. Self-employed people are responsible for their tax payments, which means you’ll need to estimate how much you owe and save it separately. A good rule of thumb is to set aside 25%-30% of your income for taxes, depending on your tax bracket.
If you’re salaried, your employer will already withhold taxes for you, but it’s still smart to understand your tax situation and whether you’ll need to pay additional amounts come tax season.
Get Clear on Your Income
Understanding your income is the first (and most crucial) step to creating a successful budget. By knowing exactly how much you bring in each month, you can make informed decisions about how to allocate your money, track your spending, and save for the future. Whether your income is steady or varies, getting a clear picture of your earnings will set the foundation for a stress-free budget. So grab your pay stubs, freelance contracts, or business income reports, and get ready to dive into the next step—tracking your spending!
FAQs About Budgeting
1. How often should I update my budget?
It’s a good idea to review your budget monthly or when there’s a significant change in your income or expenses.
2. How do I deal with irregular expenses?
For irregular expenses (like gifts or annual insurance premiums), estimate the cost and save a little each month toward them.
3. What if I can’t stick to my budget?
Don’t get discouraged. Review your budget to see if it’s realistic and adjust categories as needed. Small tweaks can help you stay on track
FAQs:
- What’s the 50/30/20 rule, and how do I use it to budget my money?
The 50/30/20 rule allocates 50% of your income towards necessary expenses (housing, utilities, food), 30% towards discretionary spending (entertainment, hobbies), and 20% towards saving and debt repayment.
- How do I track my expenses to create an accurate budget?
Use a budgeting app (Mint, Personal Capital, YNAB), spreadsheet, or simply keep a notebook to record every purchase, no matter how small.
- What’s the difference between a needs-based budget and a wants-based budget?
A needs-based budget prioritizes essential expenses (housing, utilities, food), while a wants-based budget allocates funds for discretionary spending (travel, entertainment).
- How do I prioritize debt repayment in my budget?
Focus on high-interest debts first (credit cards, personal loans), while making minimum payments on other debts. Consider the snowball method (paying off smallest debts first) or avalanche method (paying off highest-interest debts first).
- Can I use the envelope system to budget my money?
Yes! Divide your expenses into categories (housing, food, entertainment), and place the corresponding budgeted amount into labeled envelopes. This visual system helps stick to your budget.
- How often should I review and adjust my budget?
Regularly review your budget (monthly, quarterly, annually) to ensure you’re on track with your financial goals. Adjust as needed to reflect changes in income, expenses, or priorities.
- What’s the best budgeting app for beginners?
Popular budgeting apps for beginners include Mint, Personal Capital, and YNAB (You Need a Budget). These apps offer user-friendly interfaces, automated tracking, and educational resources to help you get started.