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Creating a Budget from Scratch

Creating a budget from scratch can seem like a daunting task, especially if you've never made one before or if your financial situation is complex. However, with a little planning and some basic knowledge about budgeting, anyone can create a budget that works for them.

Setting Your Financial Goals​

Before creating a budget, it's essential to set some financial goals. What do you want to achieve with your budget? Do you want to save money for a down payment on a house? Pay off debt? Build up your emergency fund? Knowing what you're working towards will help guide the rest of the budgeting process.

Identifying Your Income​

The first step in creating a budget is to identify how much money you have coming in each month. This includes:

  • Your take-home pay from work
  • Any other regular income, such as investments or freelance work
  • Spousal or partner income (if applicable)
  • Any additional income sources, such as social security benefits

Take note of any irregular income, such as bonuses or overtime pay, which can be unpredictable and should not be relied upon.

Tracking Your Expenses​

The next step is to track your expenses. This means writing down every single transaction you make over the course of a month, including:

  • Groceries
  • Rent/mortgage
  • Utilities (electricity, water, gas, internet, etc.)
  • Transportation costs (gas, insurance, parking, etc.)
  • Entertainment (dining out, movies, hobbies, etc.)
  • Debt payments (credit cards, loans, etc.)

You can use a spreadsheet, budgeting app, or even just a notebook to track your expenses.

Categorizing Your Expenses​

Once you've tracked all of your expenses, it's time to categorize them. You'll want to group similar expenses together, such as:

  • Housing (rent/mortgage, utilities)
  • Transportation (gas, insurance, parking)
  • Food (groceries, dining out)
  • Entertainment (movies, hobbies, etc.)
  • Debt repayment (credit cards, loans, etc.)

Assigning Percentages​

Now that you have your expenses categorized, it's time to assign percentages. Allocate a percentage of your income towards each category based on your priorities and goals.

For example, if saving for a down payment is a top priority, you may want to allocate 20% of your income towards housing costs.

Adjusting and Refining​

Creating a budget from scratch requires some trial and error. You may need to make adjustments as you go along, based on changes in your income or expenses.

Some common mistakes to avoid when creating a budget include:

  • Not accounting for irregular expenses
  • Over-estimating income
  • Under-estimating expenses
  • Failing to prioritize needs over wants

Conclusion​

Creating a budget from scratch takes time and effort, but it's worth it in the long run. By following these steps and staying committed to your goals, you can create a budget that works for you and sets you up for financial success.

Tips and Resources​

  • Use the 50/30/20 rule as a starting point: Allocate 50% of your income towards necessary expenses (housing, utilities, etc.), 30% towards discretionary spending (entertainment, hobbies, etc.), and 20% towards saving and debt repayment.
  • Consider using budgeting software or apps, such as Mint or You Need a Budget (YNAB), to help track your expenses and stay on top of your finances.
  • Remember to review and adjust your budget regularly to ensure it's working for you.