Budgeting 101: 5 simple steps for a good budget

While the thought of preparing a budget can be overwhelming, the results can be life-changing. Simply keeping track of where your money is going is an important enough reason to budget — but the benefits don’t stop there. Planning for long-term goals, being financially prepared for emergencies, retirement planning, and paying down or avoiding debt are all benefits you can experience with a proper budget in place.

Budgeting methods can be as simple or as complex as you choose but the basics of budgeting are the same. Follow these 5 steps and you’ll be well on your way to turning a good budget into a good habit.

Calculate your monthly household income

Figure out the net income of everyone contributing to money coming into your household. Net income is the amount of money you take home from your pay cheque after taxes and payroll deductions. Also include income from anyone in your household who receives any other kind of payments or income for any disabilities, rental properties, or other investments. It is important to include only consistent sources of income.

Determine your monthly household expenses

You’ve added up how much you’re making — now it’s time to see how much you’re spending. Determine your regular monthly household expenses and bill payments including any expenses that are paid less often than monthly. For expenses that are not paid monthly, figure out the annual amount and incorporate 1/12 of that amount into your budget. It is important that you also track your extra spending by either keeping receipts, writing it down, or using online banking.

Set your financial goals

It’s important to identify your personal financial goals so you can work them into your budget. Are you saving for a down payment on your first home? Planning a big vacation? Or are you simply setting smart goals for building an emergency fund or saving for retirement? No matter what your financial goals are, put together an amount and a timeline and start working those goals into your budget. Budgeting is the foundation to making your financial dreams come true.

Create your spending plan

This is the fun part. Put a plan together for all of your daily spending, including your hobbies and entertainment! Eating out, going to movies or other events, any fitness or sports activities, or anything else you like to buy on a regular basis. As long as you make sure it works within your budget, you can plan for this kind of spending without hurting your wallet.

Make your budget part of your lifestyle

This final step might be the most important one of all. It’s common for people to start making a significant change without actually maintaining it over time. A budget isn’t just something you do one time and then forget about. As your income and expenses change over time, always be sure to keep your budget up to date. Make sure it’s top of mind and you’re checking it on a monthly basis to make sure you’re sticking to your plans and goals, both short and long term. Making your budget part of your lifestyle will be the key to getting the benefits.

Experience the benefits of budgeting

Budgeting will reveal your spending habits and help you determine where you need to curb your spending and how to achieve your financial goals. There are many ways to track your income and expenses such as saving receipts, writing down where you’re spending money, or even using an online app for tracking your expenditures.

There is never a better time than now to begin budgeting and start experiencing those life-changing results. Understanding how you are spending your money as well as identifying areas and opportunities to save can help you create a more stable financial basis going forward, on your way to full financial freedom.