5 Steps to Creating an Effective Personal Budget That Works

Everyone wants to manage their finances well. We all have long-term plans and goals, and we want to make the most of our income in the present to prepare ourselves well for the future. Budgeting is one of the best tools anyone can use to leverage personal finances to achieve those goals and provide a secure future for themselves and their families.

When we build financial plans for clients here at Marietta Wealth, we ask for personal spending amounts to give us a clear picture of their current financial reality. If you’re considering partnering with a financial advisor like us to help you create a brighter financial future, building a budget now is the perfect first step!

4 Reasons Why Budgeting Matters

Even if you want to create a foolproof financial plan for your future, putting together a personal budget can feel overwhelming. However, building your budget – and sticking to it – is the most powerful financial tool at your disposal. Here are just a few reasons budgeting really matters.

1. Budgeting helps you take control of your finances.

If you feel like you’re living paycheck to paycheck or struggling to get out of debt, it can feel daunting to examine your finances closely. But in actuality, understanding your current financial situation is the first step to creating a better one.

As you examine both your income and your expenses, you can build a step-by-step plan to eliminate debt, allocate money differently, or save for the future.

2. Budgeting shows you how much you can save and invest.

If you want to start investing or save more money in a retirement or college account, you need a budget. Determining your income and your expenses gives you an accurate picture of how much money you can currently save or invest. It also allows you to see how you can change your spending habits to devote more of your dollars to your long-term goals.

3. Budgeting heightens your awareness of your spending habits.

All of us fall into certain spending habits without realizing it from time to time. By keeping a close eye on your budget, you can discover where you may be spending more than you should – or where you have more room in your budget than you imagined. 

4. Budgeting gives you a roadmap to reach your long-term goals.

This is the ultimate goal of every budget. A well-created personal budget should do more than track your current income and expenses. It should help you plan for the future you desire. Sticking to the budget you create reminds you of what you’re working toward, and helps you get there one month or year at a time.

4 Types of Personal Budgets

Every budget compares your income to your expenses. If you subtract your expenses from your income and have money left over, you’re in a surplus. If the opposite is true, you have a deficit. But within this framework, you can choose from several budgeting options.

Find and select a framework that works best for your financial situation, because that’s the one you’re most likely to stick with for the long haul.

Zero-Based Budgets vs. Percentage-Based Budgets

If you choose a zero-based budgeting system, you’ll allocate every dollar of your income to a specific line item or destination. This will give you a balanced budget, allowing you to see exactly how much you’re receiving, spending, saving, and investing.

This method allows you to determine exactly how much you can spend each month based on your income, which is good for those with different amounts of money coming in or going out from month to month. However, creating a new budget each month can be time-consuming.

If you use a percentage-based budget, you provide percentages for each category rather than a dollar amount. Perhaps you’ve heard of 50/30/20 – a framework that suggests you allocate 50% of your income to needs, 30% of your income to desires, and 20% to paying off debt or investigating.

However, if those numbers don’t allow you to make the most of your current income, you can alter the percentages to fit your needs.

Annual Budgets vs. Monthly Budgets

If your income is highly variable, an annual budget may give you a clearer picture of your finances. This is especially true for freelancers or self-employed people, whose paychecks don’t often come in consistent amounts or set time intervals.

However, for the vast majority of households, a monthly budget is the easiest way to see a current financial snapshot and build a realistic plan.

How to Create a Personal Budget That Works

The best budget is the one you can stick with — and these five steps will make it easier.

1.   Determine your monthly income.

For some people, this is a very straightforward process. For others, it requires some serious calculation. However, having an accurate picture of how much money is coming in each month is the foundation of your budget, so it’s important to get it right.

Keep in mind that this number should be based on your net income, often referred to as “take-home pay”, which means taxes and social security have already been deducted. Remember to add in additional income streams like dividends, interest, and other earnings if applicable.

2.   Calculate your expenses.

Once you have your monthly income number, it’s time to track your expenses. Your expenses will fall into three categories.

  • Fixed expenses are numbers that stay the same from month to month. This typically includes your rent or mortgage payment, health and car insurance, car or student loan payments, and cell phone or internet bills.
  • Variable expenses occur each month, but the cost varies with each billing cycle. Variable expenses include things like utilities, gas, and groceries.
  • Discretionary expenses are “extra” things that most of us spend money on, like entertainment, subscriptions, and restaurants.

If you find that your expenses outweigh your income, take a closer look at the discretionary expenses category. It may not be fun to cut costs in this area, but it will help you reach your long-term goals. Over time, as you pay off debt or increase your income, you can add those “fun” expenses back into your budget.

3.   Set financial goals.

After you’ve mapped your income and expenses, you can set financial goals to help you build a more secure financial future. These goals are completely up to your situation, but many personal budgets include goals like:

  • Paying off debt
  • Building an emergency fund
  • Saving for a major expense
  • Investing in a retirement plan

Whatever your goals may be, remember to keep them realistic based on your current financial reality. Budgets can (and often do!) change over time, so you may be able to allocate more money to your goals in the future. Even if you can only invest or save a little bit right now, it’s a worthwhile endeavor.

4.   Make a plan.

Now that you’ve decided where to put your money, build a plan to keep track of it! There are countless spreadsheets and budgeting apps, so try a few and find out which method works best for you. Then, keep track of income and expenses as you go. Some people do a daily check-in, while others keep receipts and bills and input them into their budgeting platform on a weekly basis.

5.   Review and adjust as needed.

Once your budget is in place, remember to review it regularly. After a few months, you may realize you are consistently spending more or less than you’d guessed in a particular category, and you can change your budget to account for that discrepancy. It’s almost important to update your budget anytime your financial situation changes.

Using Your Budget to Build Your Future

A budget is a foundational tool in building wealth and managing your money. Once you’ve mastered your personal budget, a financial advisor can help you leverage your finances to build the future of your dreams through financial planning and investment management.

If you want to make your money make sense, get in touch with us at Marietta Wealth – our advisors would love to help you find financial freedom and peace of mind for the years to come.

The information provided is for informational purposes only.  It is not intended to be used, and should not be used, as the sole basis for legal and/or tax advice.  Individuals should seek and rely upon the guidance and advice of their own legal and tax counsel before making any decisions regarding any planning, investment, tax concepts or strategies discussed herein.  Individual circumstances may vary and results discussed are no guarantees of applicability or future performance.

Marietta Wealth is a registered investment adviser.  Registration of an investment adviser does not imply any level of skill or training.  For additional information about Marietta Wealth’s financial planning and advisory services, please see the Marietta Wealth Disclosure Brochure or ADV Part 2A for full details, which is available upon request or by visiting our website. 

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