Personal Finance 101: Budgeting Basics
A detailed budget can help us achieve our financial goals and develop a plan on how to get there. 3Rivers Lending Administrator, Chris Mulkey, further explains the six basic steps of budgeting in the video below!
Step #1: Find out what income you have coming in and what expenses you have going out.
Be sure to include all income - wages, salary, tips, dividends, alimony, child support, and so on. Also do your best to include all expenses - even down to your weekday morning coffee costs and money spent on eating out, entertainment, parking, and more.
Step #2: Set financial and personal goals.
- Short-term goals: 1-4 weeks period. Example: Saving for a new piece of furniture.
- Mid-term goals: 2-12 months period. Example: Saving for a vacation.
- Long-term goals: Over one year period. Example: Saving for your child's college education.
Step #3: Create a budget for all expenses.
Break down into fixed expenses (which are set every month, like rent or a car payment) and variable expenses (can change every month, like groceries or utility bills.) | To learn more about fixed expenses and variable expenses, click here.
Step #4: Monitor your current spending patterns.
Jot down what you notice over the course of the first few weeks. Consider the following:
- Where does your money go?
- What are some expenses?
- What's included in your monthly payments, and what's the most important?
- Are you spending on wants or needs?
Step #5: Compare trends in your budget.
Compare the budget you set for yourself to how you've actually spent your money. Consider the following:
- Was your budget realistic?
- Where did you overspend?
- Where did you come in under budget?
- Did you aim too high or too low in some categories?
Step #6: Review and revise.
Take what you've discovered in Step #4 and Step #5 and list the patterns and trends in separate columns to better visualize and compare the two. From there, you can adjust your budget accordingly.
Remember, a budget is fluid until you identify the correct expense amounts. Ultimately, your goal is to adjust your spending to your budget, NOT your budget to your spending!