Figuring out how to build a budget

The first step in creating a budget is identifying all of your income sources and deciding if you want to track your budget weekly, monthly, or quarterly. It will likely be a combination of all three, because for each source of income, you’ll want to note when you’ll be paid and how much the payment will be. That way, you can accurately break down your total income into something more manageable — like a monthly budget, for instance. That provides your baseline as you move to the next step.

Your goal is to match your income against your scheduled expenses to help ensure you’ll be able to cover the essentials. Then, see how much you have left for discretionary spending, such as entertainment, clothes, charitable giving, etc.

Next, you’ll want to create a list of your essential costs, and when those bills are due, to make sure you have a plan to cover all of your needs. Then you can get a glimpse of how much you have left for optional things like entertainment.

It may help to keep records of your spending so that you can get a sense of your monthly costs, as well as the impact of periodic expenses such as holiday travel. Over time, this should help you get a detailed picture of your daily, weekly, and monthly expenses.

Another good way to make budgeting predictions is to track your past spending habits, from big-ticket items (like car and house payments) to the small stuff (like last-minute lunches or coffee).

Once you’ve got your income and expenses written down, look at whether your expenses are higher than your income.

You have two options for closing gaps in your budget: You can either find more funds or reduce your expenses. To find more funds, you might take an additional job or replace your current one with something that pays more.

To help reduce expenses, you could consider cutting any extras and splurges out of your budget, sharing rent costs with a roommate (or two), or shopping around for deals on expenses like your phone plan.

A need, or essential expense, is something important that you can’t get by without— for example, housing, groceries, and transportation. Wants are things you could go without, even if they make you happy.

Clothes, restaurant meals, entertainment, hobbies, and club memberships are enjoyable, but they are expenses that you may need to reduce or cut if you have any budget gaps. Your future self will thank you.

When you know your income and expenses, you’ve set your spending priorities, and you’ve determined needs versus wants, you have the information you need to create your personalized budget. This clear, accurate breakdown of how your money should be coming in and going out during the year should give you better control over your spending, and tracking your performance against your budget weekly and monthly will help you stay on course to help you reach your financial goals. Plus, it lets you create a plan to help build your savings — which can help you develop a financial cushion for any unexpected expenses.

Once you’ve got your budget, you should refer to it often and make adjustments as needed. Start by keeping track of your daily and weekly expenses to get a handle on what you’re spending and where you’re spending it; then use that information to help refine and execute your plan.

Income, expenses, and budgets can change often. With that in mind, you’ll want to make a habit of reviewing your budget regularly. It’s helpful to review it at the end of each week until you’re comfortable that it’s working for you, at which point you could consider doing fewer reviews — but still, at least once per month is a good idea.