If one of your New Year’s resolutions is to figure out how to make a budget, you’re in the right place. Though you may have been putting it off, establishing an effective budget isn’t difficult. In fact, it’s quite easy. Follow our step-by-step guide below to kickstart your financial wellness and learn how to make a budget for the new year.
Step 1: Determine Your Gross and Net Income
When figuring out how to make a budget, you first need to determine how much money you have each month. To do that, you need to determine your gross and net income.
Gross income is how much you make before taxes and other deductions are taken out.
Net income is what you make after those things are taken out (meaning the money that actually gets deposited into your bank account).
Calculating Your Gross Monthly Income
To calculate your gross monthly income, take your annual salary and divide it by 12. To calculate your gross monthly income if you are paid hourly, first, multiply your hourly pay by the number of hours you work per week, then multiply that number by 52. Then divide by 12.
Calculating Your Net Monthly Income
The simplest way to determine your net income, or your take-home pay, is to look at your paystubs. However, there are also a ton of free calculators online you can use to estimate your take-home pay, such as this one.
Step 2: Calculate Your Fixed Expenses
If you’ve Googled how to make a budget before, you’ll know that the next most important amount to calculate, is your monthly expenses. There are two types of expenses: essential and nonessential.
Bills you have no control over are what we call essential expenses, and they include things like:
- Auto Loans
- Health Insurance
- Student Loans
Nonessential expenses are expenses you choose to have. They include things like:
- Gym Memberships
- Cable TV
- Smartphone Data Plans
- High-Speed Internet
- Music Lessons
- Sports Fees
When it comes to your budget, you need to add up all your fixed expenses and subtract that amount from your net pay. The remaining amount is what you have to work with each month, and only a small portion of that amount should go to nonessentials. Obviously, the idea is to have as much money left over at the end of the month as you can—meaning anything you can cut out you should cut out.
With so many subscription-based services these days, you may need to think about dropping a few. To build wealth, you have to cut out the fat. Ask yourself: How much can you afford put toward nonessential expenses?
Step 3: Choose a Budget
There are all types of budget plans out there, but two really seem to have it down. They are the 60% Solution and the 50-20-30 Method.
Developed by Richard Jenkins, this budget model suggests you divvy up your income the following way:
- 60% of your income goes toward your essential expenses.
- 10% goes toward long-term savings goals, such as a down payment.
- 10% goes toward short-term savings goals, such as Christmas, birthdays, and vacations.
- 10% goes toward your retirement.
- 10% goes toward fun expenses, such as restaurants, dates, and new gadgets.
It’s methodical yet simple, which is why so many people like it.
Developed by Elizabeth Warren, this budget puts 50% of your net income toward your essential expenses, 20% toward savings and paying off your debt, and 30% toward your wants and desires.
The great thing about this budget is that it takes a lot of the thinking out of budgeting. However, because 30% of your net income goes toward “wants,” you need to be mindful of how you’re spending breaks down. For example, if you buy something you want while grocery shopping, consider ringing it up as a separate purchase to help you keep track of your nonessential purchases.
Step 4: Automate Your Budget
To kick your savings practice into overdrive, you need to automate everything as much as you can. Set up any bill you can for automatic payment and do the same with your savings and retirement accounts. Take all thinking out of the equation. The less you have to think about, the more you’ll save. Many banks offer automatic services, but if yours doesn’t, there are an abundance of automatic billing apps available for smartphones.
The Most Important Thing You Can Do? Start.
You may want to keep reading blogs about how to make a budget, but there’s no need. The greatest secret to success is just starting. Stop planning, and jump in.