How to Create a Budget: Step-By-Step Guide

Creating a budget is a great way to keep track of where your money goes each month and is an important step in getting your finances in order. Budgeting can make it easier to hit financial milestones, such as building an emergency fund or saving to pay for a home upfront.

Although the task may seem daunting, it is not difficult to create a budget. Plus, once you’re there, most of the work will be done, and you can make small tweaks as your spending or income habits change. There are many budgeting websites and apps that you can use to get started, or you can create your own spreadsheet.

Below, CNBC Select reviews how to create a budget using a spreadsheet, but many of the steps are the same as with other budgeting methods. Feel free to get creative with it – you can download templates online via Google Sheets, Microsoft Excel and other websites, or start from scratch.

Here’s how to create a budget in five steps.

The first step is to find out how much money you make each month. You’ll want to calculate your net income, which is the amount you earn in less tax.

If you receive regular paychecks through your employer, regardless of whether you are part-time or full-time, the amount listed is likely your net income.

Remember that if you signed up for a health insurance plan, flexible spending account (FSA) and/or retirement account through your employer, money is usually automatically withdrawn from your paycheck. friend. You’ll want to subtract those deductions to make sure you have a clear picture of your take-home pay.

If you are self-employed, self-employed, or simply do not receive regular paychecks, you will need to deduct tax from your earnings. According to the IRS, the tax rate for self-employment is 15.3%. You can use this TaxAct calculator to estimate how much tax you will have to pay in a year. You can then divide by 12 to get a monthly estimate.

Next, you’ll want to compile a list of your monthly expenses.

Here are some common expenses:

• Paying rent or mortgage
• Loan payments (such as student, auto and personal)
• Insurance (such as health, home and auto)
• Utilities (such as electricity, water and gas)
• Monthly phone, internet, cable and streaming subscription
• Take care of children
• Grocery
• Transportation (such as gas, train tickets and bus tickets)
• Household appliances
• Eating
• Traveling
• Gym membership
• Other (such as gifts, entertainment and clothing)

It’s also good to include details on how much you save each month, whether that’s into a traditional savings account or a high-yield savings account or an individual retirement account, such as a Roth IRA. .

Once you’ve made a list of your monthly expenses, label them whether they’re fixed or variable. Fixed costs are bills you can’t avoid: rent, utilities, transportation, insurance, food, and debt payments. Different costs tend to be more flexible – your gym membership or how much you spend on dining out, for example.

If money is tight, you can always forgo a gym membership and cut back on dining out, but you’re likely always going to have to pay rent or mortgage.

After you separate your fixed and variable expenses, list how much you spend on each expense each month. You can look up your spending on your bank and credit card statements.

Fixed costs are easier to list in your budget than variable costs because costs are generally the same every month. For example, paying off a mortgage or car loan will cost the same amount each month. But fixed utilities, such as electricity and gas, and variable expenses, such as dining and household goods, often fluctuate on a monthly basis, so you’ll need to do some math to figure it out. find the average.

For these categories and any where your spending varies from month to month, determine your average monthly expenses by looking at three months’ worth of spending. For example, to calculate the average amount you spend on groceries, add up all your grocery spending over the past three months and divide by three.

If you find that your average monthly grocery spending is $433, you may want to round up and set your spending limit to $450.

The final step in creating a budget is to compare your net income with your monthly expenses. If you find that your expenses are higher than your income, you will need to make some adjustments.

For example, let’s say your expenses are $300 more expensive than your monthly net payment. You should look at your variable expenses to find a way to cut costs by the amount of $300. This can include reassessing how much you spend on groceries, household goods, streaming subscriptions, and other flexible expenses.

You should reduce these expenses and regularly adjust the amount you spend to avoid debt.

On the other hand, if you have extra income left over after listing your expenses, you can increase certain areas of your budget. Ideally, you should use this extra money to boost your savings, especially if you don’t have an emergency fund. But you can also spend money on unnecessary things like eating out or traveling.

If you don’t already have a high-yield savings account, consider opening one, such as Marcus by Goldman Sachs High Yield Online Savings, and earn 16 times more interest than a traditional account.

Once you’ve finished creating a budget, the next step is to stick to it. You can hold yourself accountable in a variety of ways. For starters, you can set reminders with your credit card and bank account when you reach your preset spending amount. You should also try tracking all of your expenses in a spreadsheet or budgeting app immediately after making a purchase. And if you share expenses with someone else, make sure you’re both on the same budget page and keeping an eye on each other.

Goldman Sachs’ Marcus High Profit Online Savings information has been independently obtained by CNBC and has not been reviewed or provided by the bank prior to publication. Goldman Sachs Bank USA is an FDIC Member.