How To Budget in 5 Steps

Taking control of your finances doesn't sound easy or like much fun but is essential in turning your credit around. Budgeting doesn't have to take a ton of time or stifle the fun in your life. With a few simple steps you can become more in control of your finances, get rid of some of that pesky debt and start saving more.

1. How much do you make?

The first question you need to answer is what is your income? Not income in a broad sense but income as in exactly how much you take home after taxes. Looking at tax documents is helpful for this step. Knowing how much you actually take home can make a much clearer picture of your finances.

2. How much are the essentials?

There are some things you have to spend money on every month. Take into account the bill payments you make on a monthly and yearly basis that you cannot avoid like rent, cell phone bills, car payments and student loan payments. Ideally these things should cost no more than 50 percent of your take-home pay.

3. Hows much do I spend?

This one may take a little more time but is important to complete - how much are you spending on the non-essentials? Things like entertainment, coffee and shopping fall in this category. Go into your bank and credit card statements and make a spreadsheet so you can see how much you are spending on these non-essentials month to month. Do at least a three month spread to get a good picture.

4. Adjust habits

Divide your net income by 12 and you have the amount you take home every month. Now factor in your monthly essential bills and the remaining is what you have left to save or spend. Ideally you want to spend no more than 50% of your monthly income on the essentials but that isn't necessarily possible for everyone. 

Now take your findings in the third step and apply them here. A good rule of thumb is to only spend 50% or less of that remaining monthly income on the non-essentials with the rest going to financial goals and savings. If you spend nearly all of it every month it is time to change your habits. Eliminate a coffee a week, skip the movies once in a while or paint your nails at home. Once you see how much you spend on the non-essentials chances are you will know where the changes need to be made.

5. Create a plan

With all the information you have collected create a plan that you can stick to. Set a monthly spending allowance that is realistic for your life and try to stick with it. A budget isn't set in stone so don't worry if you feel stressed about it. Maybe you spend more the first week of the month and less the next week - just simply adjust your allowance to meet your needs. Once you get used to living within these new guidelines you will feel comfortable and it will become routine.