What’s the golden rule for achieving financial stability? Do not spend more than you make. It sounds easy, but thanks to our high cost of living many people have a difficult time sticking to this mantra.
Creating and sticking to a simple budget is key to living within your means and achieving financial freedom. But if you are like many, you have never created a budget before and have no idea where to start.
We’re here to help.
In this guide, we will outline some simple strategies for creating your very first budget. Yes, it will require some effort on your part, but we promise to keep it simple.
If you still have questions after reading through this guide, give us a call. We’re here to help.
Let’s get started!
Determine your favorite budgeting system
One of the first things to do is decide what type of budgeting system will work best for your personality. That is, what type of process you will use to track your budget.
If you have never budgeted before, let’s take an honest look at who you are and how you like to do things:
- Are you a hands-on learner? Do you like to do things yourself and learn everything about the process in order to fully understand it? If so, you should consider a manual budgeting system.
- Are you tech savvy? Do you prefer to automate processes in order to get things done in the least amount of time? If so, you may like using an automated budgeting system.
Manual budgeting: If you do not have access to a computer, a traditional pen and graph notebook method is an option for manual budgeting. If at all possible, opt for a budget spreadsheet. There are plenty of pre-made templates, so choose one that is as simple or detailed as you like. It may take a few trial runs to land on the spreadsheet that works best for you and that’s okay.
Automated budgeting: If you prefer a more hands-off approach, take a look at some free budgeting software programs, such as HawaiiUSA’s My-Fi. This online service allows you to link other accounts to your HawaiiUSA accounts, meaning you do not have to manually enter every financial transaction. Take some time to explore your options to see what you prefer.
Track your spending
Now that you have landed on your preferred budgeting system, it’s time to use that process to track and review your spending habits. This step can feel uncomfortable for some, especially if you don’t usually pay much attention to how much you’re spending. But do not be discouraged. Just keep the end goal in mind—a successful financial future.
Here is a step-by-step process to get you started:
- Pull up your bank statements and all your cash receipts from the past month
- Using your manual or automatic budgeting system, start organizing a list of what you spent. We recommend outlining the following information:
- Where you spent the money
- How much you spent
- What you spent it on
- Don’t let any spending escape your notice. Write down everything. From paid bills, to shopping, to car insurance—everything.
- Add up all your expenditures and see what you find. The good news is you are getting your spending under control in the months ahead.
- Tip: It’s okay if you do not have a complete record of everything you spent last month. Just plan to track your spending over an entire month before moving onto the next step.
Sort your expenses by category
To get a better handle on where all your money is going every month, sort your spending into four categories:
- Fixed spending
- Variable spending
- Debt repayment
Under each of these four primary categories you should list your specific types of expenditures. Here are examples of what these should include:
• Fixed spending: All your expenses that occur every month and are always the same, such as your mortgage or rent, gym membership, and so on
• Variable spending: All expenses that fluctuate from month to month, like your grocery bill or entertainment costs
• Debt repayment: Payments like your student loan bills and credit card debt bills
• Savings: The amount per month you’re putting toward your savings accounts. If you aren’t currently putting money into savings, now is a good time to start. A good rule of thumb is to save at least 10% of your monthly income.
Calculate your earnings to spending
You’re almost done! The final step before creating your official monthly budget is to review all the spending information you’ve compiled. It’s time to evaluate how well you’re living within your means.
Are you spending more or less than you’re earning on a monthly basis? Which category is most of your money going towards? Where could you cut back?
Here’s a good way to look at this information:
1. Calculate how much you take home each month from your employer, after taxes
2. Subtract your monthly debt repayment costs and savings
3. Subtract the total cost of your monthly fixed expenses
4. Subtract the amount you’re spending each month on variable spending
5. How much money do you have left? Are you in the positive or negative?
Tip: Our Budgeting Calculator is a great tool to help with this step.
Outline next month’s budget
The time has come to create your budget. This will be easy now that you’ve completed all the previous steps.
Based on your spending figures, identify how much money should be allocated toward each of the four major expense categories and then stay within those limits.
If you are coming up in the negative every month, or even if you are barely making it in the positive, you will need to identify the variable spending categories that you can cut back on. Avoid cutting back on your savings expenses or debt repayment.
If you have chosen a manual budget system, update your spreadsheet at the end of every week, calculating your expenses to ensure you’re staying on track. If you have chosen an automatic budget system, you’ll need to check in on your account a few times a month.
Do not be afraid to make adjustments as you begin to understand your personal budgeting style and long-term spending habits. This is a work in progress and it will only get more efficient as time goes on!
You did it!
Congratulations on creating your first budget! Your future self will thank you for taking the time to plan ahead and get your finances in order.
If you have questions about creating a budget or want to talk to a financial advisor about planning for your future, contact us. We are committed to supporting you with the financial services you need to get ahead.