Some of you out there might think this is interesting but there are a lot of people out there who do not know how to make a realistic budget, or any budget for the matter. I have a couple of friends who said that they’ve never had a budget, and don’t even know where to begin.

Having a budget is very important. It can help you reach your goals, such as saving for a down payment for a house, reaching your retirement goals, buying a new car, and so on. Setting a certain amount every month to the side that is dedicated to whatever you want to be dedicated to is a big motivator for most, including me.

Of course there are many variables that need to be thought about when making your first budget, but in this post I will be giving mainly beginner tips on how to create your first budget, in order to not overwhelm anyone.

Here’s what you should do:

1. Gather your expenses

Think of every expense that you have, and gather up all of your bills and receipts. Your budget should be realistic of what you usually spend each month, so this is a key thing to do when making your budget. Separate each expense into a category such as home, food, utilities, etc., just so that you can keep better track of it all.

Make sure you include EVERYTHING. Don’t forget about things that you might only pay once or twice a year such as home and car insurance as well.

2. Make a list

After you organized your expenses, make a monthly budget of what you think your expenses will be. Try and create a buffer of what you think will work as well, as some months you might go over (such as in the summer because your air conditioning bill might be higher).

Make sure you include entertainment, as some people like to put this at $0, but who honestly does not do ANYTHING in each month? You still want to be happy when you have a budget of course.

Also, do not forget about savings and retirement when you make this list! You do want to retire right? Make sure to pay yourself first.

3. Figure out your monthly income

Add up your income and make sure it is realistic. Total your salary, bonuses, extra income, etc. to see what your income is. Usually I don’t include income unless I am 100% positive that I will be earning it, as just assuming you will ┬ámake extra income by selling something might be a little hard. Live off what you make, not what you might make.

4. Figure out how much you have leftover!

Hopefully you have something leftover when you subtract your expenses from your monthly income. Figure out what to do with this surplus, such as dedicating it towards a new goal, such as travel.

If it turns out that you are negative in your budget, go back and figure out ways that you can cut certain expenses out of your budget. If there is nothing that you can possibly cut, then look for ways to increase your income. This can be looking for a new job altogether, obtaining a part-time job and so on. You really want positive cash flow!

Do you have a budget? Why do you have one?


Michelle Schroeder is the founder of Making Sense of Cents and Diversified Finances, a personal finance and lifestyle blog about budgeting, traveling, life, and student loans. Read further on her story and life.