How to Create a Comprehensive Budget

You may think you have a grasp on your financial health, and maybe you do. But when it comes to budgets, it’s a good idea to review and revamp regularly. It takes some responsibility and hard work, but creating a budget that accounts for all you spending and saving habits can really pay off. So gather your financial statements and check out the steps below to make the type of plan that will help you manage your money the best way to maximize your funds.

Calculate Your Real Income

You know your salary so you know how much you have to work with, right? Not necessarily. It’s a good idea to calculate all your sources of income — without leaving anything out. This includes tax refunds, gifts and bonuses. Next, you have to be sure you are using net income or the after tax takeaway pay amount when creating your budget so you do not spend more than you truly make.

Track Spending

After determining how much money you truly have to work with, it’s important to figure out how much money you are spending. Group and add up everything on your receipts and bills, creating and organizing a list of monthly expenses. Excel and other online tools can be helpful with this. While you can look over one month to get an idea, it will likely be even better to look at an average of six or even 12 months of spending. Be sure you don’t leave anything out, from the every-month predictable costs like mortgage and life insurance payments to groceries, utilities, birthday presents, retirement savings and debt repayment. Even if they are variable and will change each month, including everything can help you calculate a monthly average down the road (or you can use that average if you are tracking six or 12 months’ worth of spending).

Differentiate Needs From Wants

Now you can easily see where your money is going. Are you surprised? Then it’s a good thing you are making a budget! And this is where it gets personal. It is up to you which expenses are needs and which are wants. In general, basic needs include rent, groceries, work clothes, health bills, electricity and basic services. These are things you cannot go a month without. So that does not include a fabulous new pair of uncomfortable shoes, dinner and drinks with your friends on the weekend or a high-end vacation to Dubai. Those would be wants. These are the “extras” in life — and while they may be important to your happiness, they require a little more thought when it comes to budgeting.

Set Goals

Many experts suggest you spend 50% of your net income on needs and divide the rest (almost evenly) between wants and savings. But, budgeting is highly personal and you need to determine what you prioritize and how you want to live. If you place high importance on retiring early, you will likely put more of your monthly budget in that area than someone who places more importance on traveling in his or her youth. Think about how much cash after expenses you have, how much you need for retirement, any debt repayment you should be working on, and your likelihood of buying a home. It’s important to set attainable goals, calculate what it will take to get there, and create your own individual plan accordingly.

Make Adjustments & Review Often

Arguably the most important part of budgeting besides creation, reviewing your budget regularly can ensure you are sticking to the plan. You will likely need to adjust your budget and variable, “want” expense section if you are spending more than your income allows. Likewise, if you get a raise, you will need to decide what to do with this new money. In fact, if there are any chances in your income, rent cost, or even gym membership, it’s a good idea to edit your budget accordingly to make sure you are still on track for your financial and life goals.

You may also want to monitor your credit for signs of changes, especially if you’re budgeting because you’re trying to save up for a big purchase like a car or a home. Both of those purchases normally require a credit check (if you don’t pay cash), and building good credit beforehand can save you money in interest over the life of your loan. You can check your credit scores for free on Credit.com.