Your budget is a plan for how you’ll spend and save money. It helps you see where your money goes each month so you can make changes if necessary.
Your first step is to calculate your gross monthly income and your net monthly income (also called take-home pay). Gross income is what you earn before taxes or other deductions, such as retirement contributions or health insurance premiums. Net income is what’s left after these deductions are taken out.
Next, list all your fixed expenses. These are costs that remain the same each month, such as your rent or mortgage, utilities and car payment. Also include variable expenses, which vary from month to month such as food and entertainment. Finally, if you have any one-time expenses coming up, such as an upcoming wedding or new tires, add those to your list.
Then, separate your needs from your wants. Needs are essential, like housing and food, while wants may be more discretionary, such as a restorative spa visit or a vacation. Depending on your priorities, you might choose to prioritize getting out of debt or saving for an emergency fund before focusing on your wants.
Once you’ve finished your budget, compare it to your income and expenses to see if you’re spending less than you’re making. If you’re not, consider ways to increase your income. That might mean working overtime, finding a second job or even taking on freelance work. You can then use the extra income to help you meet your savings goals, pay down debt or fund an emergency fund.