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Step 2 of 12 to Financial Wellness: Creating a Budget

Every month this year, we're bringing you another step you can take on the path to financial wellness. Last month, we suggested tracking ALL of your spending — from your rent or mortgage all the way down to that morning coffee.

Now that you’ve tracked your spending and kept a careful record of where your money goes over the course of a month, you’re ready to move onto the next step of financial wellness: creating a budget. Combined with tracking your spending, planning your future spending with a budget can play a crucial role in promoting financial awareness, which then helps to facilitate more responsible money choices. This discipline will benefit you and everyone in your household, too! 

Create a budget in 5 easy steps

  1. Track your spending and income. This includes all your financial documents, such as your account statements, bills and pay stubs. If you did this step last month, you're already in good shape here!

  2. Add up your totals. Calculate the totals of your monthly expenses and all your streams of income. If your income is greater than your expenses, you’re in a good place. However, if your expenses exceeded your income, or the numbers are too close for comfort, you’ll want to trim some discretionary expenses to make it through the month without falling into debt if an unforeseen big expense happens. This could mean a lot of things from making coffee at home or eating out less, to buying only the new clothes you really need, and being more careful with your utility bills.

  3. List your needs. Your needs include anything that is essential for living and basic functions, such as rent or mortgage payments, savings, food and clothing. Needs always take priority in a budget. As you list each need, write down its corresponding cost. Sum up the total of your needs when you’ve finished. Some of these may have variable costs, like your utility bills, so make sure to list a range of cost here.

  4. List your wants. This includes anything that is not essential for living, like entertainment, brand-name clothing and eating out. Here, too, note the monthly cost of each item on your list and add up the total when you’re done. 

  5. Assign dollar amounts to your expenses. Open a new spreadsheet and copy your list of expenses, starting with fixed-cost needs, then non fixed-cost needs, and finally, your wants. Assign an appropriate dollar amount for each of these costs, making sure the total does not exceed your estimated total for monthly expenses. 

  6. Review and tweak as necessary. You will likely need to adjust the amounts in each expense category at least once a year to keep your budget relevant. Likewise, you will hopefully be able to increase the amounts in the income column as you move upward in your career path or find additional income streams. 

Budgeting systems

While every kind of budget involves tracking expenses and committing to a maximum spending amount each month in each category, there is a wide range of budgeting systems to fit every kind of personality and money management style. 

The traditional budget doesn’t involve much more work than the steps described above. After working out a number for every expense category, you’ll simply need to track your spending throughout the month to ensure you’re sticking to the plan. You can use a spreadsheet for this purpose, or utilize one of the popular budgeting apps, like CommonWealth One's MoneyTools in your online banking, Mint or YNAB, and do it digitally. 

The money-envelope system works similarly. However, instead of simply committing to sticking to your spending amounts for each expense category, you’ll withdraw the amount you plan to spend on all non-fixed expenses in cash at the start of the month. Divide the cash into separate envelopes, using one for each of these expenses. Then, withdraw cash from the appropriate envelope when making a purchase in that category. There’s no way to blow your budget with this system; when the money in the “Dining out” envelope runs dry, that’s all for this month! You can combine this system for non-essential purchases with a traditional budget for essential items or bills you pay online, like for your rent or mortgage, car payment or utilities. 

The 50/30/20 budget is simpler, but requires more discipline. Set aside 50 percent of your budget for your needs, 30 percent for wants and the remaining 20 percent for savings. Of course, you’ll need to make sure your income and expenses will work with this kind of budget. Does 50 percent of your income cover your needs? If yes, this budget allows for more individual choices each month and less accounting and tracking of expenses. If not, you can try 60/20/20 for needs, wants and savings.

A well-designed budget can provide you with a sense of financial security and freedom. When you stick to a budget, you’ll always know you have enough to get through the month and save for the future. 

Information is valid as of publication date and rates are subject to change without notice. Click here to view current deposit rates and current loan rates

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