Creating a realistic budget is one of the most empowering things you can do for your financial health. Whether planning short-term goals like saving for a vacation or long-term goals like buying a home or retirement, budgeting helps you track where your money is going, reduce stress, and avoid debt.
But if you’ve ever tried to stick to a budget, you know that it can be easier said than done. So how do you create a budget that works in the real world?
In this blog post, we’ll break down exactly how to create a realistic budget that you can follow. We’ll discuss easy-to-understand strategies, share real-life examples, and provide expert tips for making budgeting a habit that sticks.
Why Creating a Realistic Budget Is Important
Before we dive into the how, let’s talk about why budgeting matters. According to NerdWallet, nearly 60% of Americans don’t have a budget, which makes it harder to track expenses, save for goals, or stay out of debt. When you don’t have a clear picture of your finances, it’s easy to overspend, waste money, and feel stressed about your financial situation.
A well-thought-out budget can help you:
- Stay in control of your spending
- Achieve financial goals (e.g., paying off debt, saving for a home)
- Avoid unnecessary debt and interest payments
- Build an emergency fund for unexpected expenses
By following a realistic budgeting plan, you can set yourself up for financial success and long-term stability.
Step 1: Determine Your Monthly Income
The first step in creating a realistic budget is knowing exactly how much money you have coming in, Including your primary salary, any side income, freelance work, or passive income sources.
Real-life Example:
Let’s take Sarah, a 28-year-old marketing professional. Sarah makes $4,000 a month from her full-time job, but she also runs a blog that brings in an extra $500. This means her total monthly income is $4,500.
When calculating your income, be sure to account for after-tax earnings. This is the actual amount that will land in your bank account. If you’re self-employed or have a variable income, it’s a good idea to average your earnings over the past few months to get an accurate estimate.
Step 2: List Your Fixed Expenses
Fixed expenses are costs that remain the same every month, like rent, utilities, and car payments. These are often non-negotiable, and they should be the first expenses you account for in your budget.
Common Fixed Expenses:
- Rent or mortgage payment
- Car payment or transportation costs
- Insurance premiums (health, auto, home)
- Loan payments
- Subscriptions (e.g., streaming services, gym memberships)
Real-life Example:
For Sarah, her fixed monthly expenses include:
- Rent: $1,200
- Car payment: $300
- Health insurance: $150
- Student loan payment: $200
- Streaming subscriptions: $50
Her total fixed expenses come to $1,900.
Step 3: Identify Your Variable Expenses
Next, take a look at your variable expenses. These costs can fluctuate from month to month, such as groceries, dining out, entertainment, and utilities. The key to budgeting effectively is to have a clear idea of how much you’re spending in each of these categories.
Common Variable Expenses:
- Groceries
- Dining out
- Utilities (electricity, water, gas)
- Gas and transportation
- Entertainment (movies, events, subscriptions)
- Clothing and personal care
Real-life Example:
Sarah’s variable expenses for the month are:
- Groceries: $350
- Gas: $100
- Dining out: $150
- Entertainment: $75
- Miscellaneous (shopping, etc.): $50
Her total variable expenses add up to $725.
Step 4: Set Goals for Savings and Debt Repayment
One of the most powerful aspects of budgeting is using it as a tool to reach your financial goals. Whether you’re aiming to pay off credit card debt or save for a vacation, allocate a portion of your income toward these goals.
Expert Insight:
Certified financial planner, Rachel Cruze, says, “Budgeting isn’t about restriction; it’s about freedom. When you have a budget, you’re giving every dollar a job, and you’re deciding how it will help you achieve your goals.”
Real-life Example:
Sarah has two primary financial goals:
- Build an emergency fund of $2,000 over the next six months.
- Save $300 a month for a down payment on a house.
This means that Sarah needs to allocate $500 for savings and debt repayment.
Step 5: Track and Adjust Your Spending
Once you’ve set your budget, the next step is sticking to it! Tracking your spending throughout the month helps you stay on track and make adjustments when needed. Many people struggle with sticking to a budget simply because they’re not paying attention to where their money is going.
Tools for Tracking Your Spending:
- Mint: A free app that tracks your spending and helps you set goals.
- YNAB (You Need A Budget): A popular budgeting tool that focuses on helping you assign each dollar a job.
- Spreadsheets: For those who prefer a more manual approach, Google Sheets or Excel can be used to track expenses.
Real-life Example:
Sarah uses Mint to track her spending. After one month, she notices that she spent more on dining out than she expected. By adjusting her grocery shopping habits and cooking more at home, she was able to save $50, which she redirected into her savings fund.
Step 6: Review and Adjust Your Budget Regularly
Creating a budget isn’t a one-time activity—it’s a habit. Your financial situation will change, and your budget should reflect those changes. Maybe you get a raise, or perhaps you pay off a loan. Whatever the case, it’s essential to review and adjust your budget regularly to ensure that it’s still realistic and aligned with your goals.
Pro Tip:
It’s recommended to review your budget at least once a month. During this time, check to see if you’re meeting your savings goals or if any variable expenses have increased. Adjust as needed so you don’t fall off track.
Common Budgeting Mistakes to Avoid
While budgeting can be a game-changer for your financial health, there are some common mistakes that many people make. Being aware of these pitfalls can help you stay on track.
1. Not Budgeting for Unexpected Expenses
Life is unpredictable, and unexpected expenses will arise. Whether it’s an emergency car repair or a medical bill, it’s important to leave room in your budget for these unplanned costs.
Tip: Include a “miscellaneous” category in your budget to account for these types of expenses.
2. Setting Unrealistic Goals
While it’s important to aim high, setting goals that are too ambitious can set you up for failure. Start small, and gradually increase your savings rate as you get more comfortable with budgeting.
Tip: Be flexible with your goals, and break them down into manageable steps.
3. Forgetting to Track Small Purchases
It’s easy to overlook small purchases, but they can add up quickly. A $5 coffee every day or an impulse buy at the store might not seem like much, but over time, it can drain your budget.
Tip: Track every purchase, no matter how small, to get a true picture of your spending.
Conclusion
Creating a realistic budget is a powerful tool that can help you take control of your finances, reduce stress, and achieve your financial goals. The key is to create a plan that reflects your income, your priorities, and your lifestyle. By following these steps, you’ll have a solid foundation to build your financial future.
Remember, budgeting is a process. Don’t be discouraged if things don’t go perfectly at first. With time, you’ll become more comfortable and confident in managing your money. So, start today, make adjustments along the way, and you’ll be on your path to financial success.