A budget is a plan to control spending and allocate resources for specific purposes. It may express intended expenditures along with proposals for how to meet those expenses with available funds, or it might show a surplus, providing resources that can be used at some future time.
To build an effective budget, start with a clear understanding of your income and spending. Calculate your net income, or take-home pay, by subtracting taxes from your paycheck, as well as deductions for employee benefits like health insurance and 401(k) contributions. Then, subtract fixed expenses such as your mortgage or rent, food, transportation costs including gas, utilities, and debt payments from your monthly income. Finally, determine your variable expenses, such as entertainment and clothing. If you discover that your expenses are higher than your income, consider ways to make adjustments. This could include working additional hours or finding a side job, changing habits that are expensive (like eating out), or saving the difference in an emergency fund or debt repayment plan.
Once you have a clear picture of your expenses, you can begin to control wasteful spending and establish priorities. Ideally, you want to have enough money left over to save and achieve your goals. To keep yourself accountable, review your budget and spending on a regular basis. This will help you stay on track, especially if your circumstances change over time. For example, you might receive a raise, need to reduce your expenses, or reach a financial goal and want to plan for something new.