5 Steps for Creating a Personal Budget

A woman drafting a personal budget.

If you don’t have a working monthly budget, you’re not alone.According to a 2016 study, only 41% of Americans use a budget to keep track of their finances.2 While the mere mention of the word “budget” can conjure up images of belt-tightening and austerity, creating a budget doesn’t mean sacrificing all of the fun in your life.On the contrary, a budget helps you achieve your financial goals and ultimately reduces the stress you may feel about spending and saving money.4 To help you get on the right track, Tennessee State Bank has put together five steps for creating an effective personal budget.

1. Determine Your Monthly After-Tax Income

The first step of drafting a budget is figuring out what your total take-home pay is for each month.5 If you receive a salary or get regular paychecks, this information should be easy to find. People who have more irregular income, such as independent contractors or small business owners, should average their earnings from the last six to 12 months.6 As you crunch the numbers, don’t forget to include money you make from side gigs, freelance work, Social Security checks, and any other sources of income.7

2. List All of Your Monthly ExpensesA couple looking over their expenses.

Once you’ve figured out your monthly income it’s time for a slightly less fun activity: listing all of your monthly expense. Go through your credit card statements and bills to find out where your money is going on a monthly basis. Common culprits include rent or mortgage payments, utilities, groceries, car payments, auto insurance, student loans, and entertainment.8

3. If Your Income is Greater Than Your Expenses…

Ideally, your monthly income will exceed your expenses. If this is the case, there are a number of smart ways for you to use your leftover cash. Erica Holland of ModMoney suggests the following ideas:

  • Pay down any debt you may have.
  • Set up an emergency fund with three to six months of living expenses.
  • Contribute to your retirement account.
  • Start an investment account.9

A couple working on a budget together.4. If Your Income is Less Than Your Expenses…

If you aren’t able to cover your monthly expenses, you will either have to devise a plan for bringing in additional money or (more likely) determine where you can make cuts to your spending. Many financial experts recommend looking over your list of expenses and deciding which expenses are absolutely necessary and which ones are discretionary. Once you have identified your discretionary expenses, figure out which items you can reasonably cut back on.

Bev O’Shea of NerdWallet suggests adopting a 50/30/20 budget, in which you spend 50% of your after-tax dollars on necessities, up to 30% on discretionary items, and at least 20% on debt repayment and savings. Of course, everyone’s situation is unique, but striving for the 50/30/20 ratio is a helpful guideline to keep in mind as you get your finances in order.10

5. Review Your Budget Each Month and Make Adjustments

The best way to know if you have devised a good budget is to put it into practice and review it at the end of the first month. Were you accurate in estimating your monthly expenses? Were you able to stick to your goals? After reviewing your spending from the first month, look over your budget and see if it requires any changes. Be sure to tweak your budget throughout the year as your financial situation changes.11

About Tennessee State BankThe corporate headquarters for Tennessee State Bank.

Tennessee State Bank has been serving our local community for over 45 years. With branches in Sevier County, Knox County, Cocke County, and Jefferson County, we offer convenient banking services in East Tennessee. Whether you’re looking to open a checking account, obtain an auto loan, or apply for a home mortgage, we make the process as simple and straightforward as possible. Tennessee State Bank’s motto is “Banking at its Best!”SM, and we strive to live up to that creed every day. Let us know how we can help you by sending us a message via our Contact Form.

Tennessee State Bank is Member FDIC and an Equal Housing Lender.
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References
1.S, Pat. “12 Steps for How to Make a Budget – Personal Budgeting Tips for First Timers.” Money Crashers, www.moneycrashers.com/how-to-make-a-budget/.
2. Backman, Maurie. “Nearly 3 in 5 Americans are making this huge financial mistake.” CNN Money, 24 Oct. 2016, money.cnn.com/2016/10/24/pf/financial-mistake-budget/index.html.
3. Kossman, Sienna. “8 Steps to Creating a Personal Budget.” U.S. News & World Report, 18 Oct. 2013, money.usnews.com/money/personal-finance/articles/2013/10/18/8-steps-to-creating-a-personal-budget.
4. Meyer, Chelsy. “How to Create a Personal Budget.” Fiscal Tiger, 5 Apr. 2017, www.fiscaltiger.com/how-to-create-personal-budget/.
5. Ramsey, Dave. “How to Make a Monthly Budget That Works.” DaveRamsey.com, www.daveramsey.com/get-started/budget.
6. Meyer, Chelsy. “How to Create a Personal Budget.” Fiscal Tiger, 5 Apr. 2017, www.fiscaltiger.com/how-to-create-personal-budget/.
7. Ramsey, Dave. “How to Make a Monthly Budget That Works.” DaveRamsey.com, www.daveramsey.com/get-started/budget.
8. Vohwinkle, Jeremy. “Make a Personal Budget in 7 Steps.” The Balance, 23 Feb. 2018, www.thebalance.com/how-to-make-a-budget-1289587.
9. Holland, Erica. “5 Simple Steps to Creating a Personal Budget.” ModMoney, 4 May 2017, www.mod-money.com/5-simple-steps-to-creating-a-personal-budget.
10. O’Shea, Bev. “Budgeting: How to Create a Budget.” NerdWallet, 4 Oct. 2016, www.nerdwallet.com/blog/finance/how-to-build-a-budget/.
11. Vohwinkle, Jeremy. “Make a Personal Budget in 7 Steps.” The Balance, 23 Feb. 2018, www.thebalance.com/how-to-make-a-budget-1289587.