How to Create a Good Budget – 8 Key Tips

Calculating your expenses and post taxes income will be absolutely vital for creating an effective budget and saving you money.

There are certain tips to set yourself up for creating a detailed and effective budget.

Utilize the following 8 tips in this order to build an effective budget:

Calculate Expenses

Calculate Gross Income

Calculate Post Taxes Income

Subtract Monthly Post Taxes Income by Monthly Expenses

Record Spending and Keep Track of Progress

Be Realistic With Spending Goals

Start Building A Safety Net

Save Money for Miscellaneous Expenses

These tips will help set you for success and give you a realistic chance at creating and maintaining a budget.

This post will show you how to create a good budget by learning to calculate effectively and giving you a significantly better chance at maintaining this budget.

Calculate Expenses

Calculating expenses is the first step in creating your budget and will give you tons of vital information. Type out a list of all your expenses until you think you’ve got them all.

If you have online banking, then you should use that here to look at your bank statements for the last year to determine if there are any expenses that you have forgotten to put on your list.

Once you have your total expenses for the year, add all of them up to get the total yearly expenses.

Then you divide that total by 12, which will give you the total monthly expense.

If your total expenses for the year were $20,400, then dividing it by 12 would give you $1,700 per month.

$20,400 = Total Yearly Expenses

$20,400/12 = $1,700 Total Monthly Expenses

Breaking down how much each you have to pay per month for expenses is going to give you an amount to focus.

Always include a miscellaneous expense category because this will account for any smaller or larger unexpected expenses.

Having a miscellaneous expense will give you some extra cushion to allow you to not be as tight with money.

1,000 dollars
Calculate Gross Income

Calculate Gross Income

Calculating your gross income is the next step and can be completed quickly and easily.

Gross income is the total amount of income you will earn before you subtract what you will owe for taxes.

Complete this step by taking your weekly income and multiplying it by 50.

If your weekly income is $600, then multiplying this amount by 50 would give you $30,000.

$600 = Weekly Gross Income

$600×50 = $30,000 Yearly Gross Income

I know that there are 52 weeks in a year but I prefer to error on the safe side.

I  anticipate that at least 2 weeks of the year are going to be unpaid due to sick days or some other unexpected reason.

If your income fluctuates during the year, then try to accommodate for that as much as possible and give yourself extra margins for error.

By this I mean that you should allow up to an extra 10% decrease in total income for the year.

If you calculate your gross income this way, then you will have some necessary breathing room because you will understand how much money you have to work with for the year.

Calculate Post Taxes Income

Calculating the difference between your gross income and post taxes income is a very important step in understanding where you financially stand.

This step can give you critical information about how much money you really have after all of your expenses have been accounted for.

Tax Sign
Account for Taxes Accurately

The main taxes you want to be prepared for include the following:

  • FICA Tax, Which Includes Social Security and Medicare
  • State Income Tax
  • Federal Income Tax

To accurately estimate these taxes I like to use a calculator on a specific tax focused website.

There is a calculator that is designed to quickly give your post taxes income called the Income Tax Calculator.

Go to this website and type in your total income for the year, what city you reside in and your current filing status.

After entering this information, it will allow you to get quick results about what you will pay for taxes that year and what your post taxes income will be.

If you go to this website and use the $30,000 yearly gross income number that was calculated above, then it would tell you that you would owe $4,798 in taxes and that you have $25,202 post taxes income.

$30,000 = Yearly Gross Income

$30,000-$4,798(Calculated Taxes) = $25,202 Post Taxes Income

An important note for these tax calculations was that I was stating that I am in California and if you are in a different state, or different country, then the taxes that you owe will likely be different.

If you are interested in learning more tips for how to save on taxes, read How to Save Money on Your Taxes.

From here I like to take the total post taxes income and divide it by 12 to get the monthly post taxes income.

$25,202 = Yearly Post Taxes Income

$25,202/12 = $2,100 Monthly Post Taxes Income

Doing this break down of your yearly post taxes income into what your monthly post taxes income will be is going to give you critical information on how much money you really have to work with.

Subtract Monthly Post Taxes Income by Monthly Expenses

Next take the monthly post taxes income and subtract the monthly expense to give yourself the net income each month.

Net income is the total amount of income after all expenses and taxes have been taken into account.

For example, if the monthly post taxes income is $2,100 and the monthly expense total is $1,700, then there will be an extra $400 dollars per month.

$2,100 = Monthly Post Taxes Income

$2,100-$1,700 = $400 Net Monthly Income

If you end up having a situation where your monthly expense total is greater than your monthly post taxes income, then you will need to try to reduce your expenses as much as is realistically possible.

Focusing on reducing some of the more flexible expenses including food, car insurance and miscellaneous could provide you with some quick ways to save money.

If you want to learn more about ways to save money and reduce expenses, read How to Save Money on a Low Income.

This post will give you many ideas on how to reduce key expenses.

Once you understand what your total post taxes income is and what your total expenses are, you can start taking your money managing skills to new heights!

Calculator
Record Spending Details and Keep Track of Progress

 

Record Spending Details and Keep Track of Progress

Keeping track of your expenses is an important step and can be accomplished through one straight forward way.

You can use an Excel Simple Budget document, or a Numbers(Excel for Mac) Simple Budget document on a Mac computer, which will both do the calculations for you and save you a lot of time.

I used a combination of the Simple Budget and looking on my bank account online to keep track of all my expenses.

I like to use online banking to look at my payment records to make sure that an expense hasn’t slipped through the cracks somehow.

Doing this helps me keep track of my expenses and prevent an unexpected expense from taking money out of my bank account, such as an extra fee or an unused subscription that is still billing me monthly.

Be Realistic With Spending Goals

Try to be realistic with how much you are spending and don’t shoot for unsustainable amounts.

Determine what your realistic amounts are for each expense and try to stick with those amounts. If you do this, then you will have a much greater chance at sticking with your budget.

One of the biggest ways to set yourself up for success is to include the miscellaneous expenses and other unexpected expenses in the budget.

By adding this expense to the budget, you will be set up for success by giving yourself some essential breathing room.

It is important to note that you will likely make adjustments to the budget periodically to account for any significant changes, such as a raise at work or increase in gas expense.

When I am first creating a budget, I like to revise it once every month because that way I can accurately know where I am.

The longer you stick with a budget the more you will know what your expenses truly are because you will know what is too frugal and what is just right for each adjustable expense.

If you want to learn more about budgeting money, read How to Budget Your Money Better.

Stacks of cash
Start Building a Safety Net

Start Building a Safety Net

Start building a safety net by setting aside a certain amount every month.

A safety net is usually an amount in your bank account that is large enough to protect you from unexpected expenses for a certain amount of time.

A safety net of money will actually help you maintain your budget because it will protect you from the unexpected costs that life will throw at you.

If you can build up at least 3 months worth of expenses as a safety net amount in your bank account, then this should be enough to give you some critical financial cushion.

3 Months Worth of Expenses = Ideal Safety Net Amount

Each person could require less or more than 3 months worth of expenses in their account.

But starting with a 3 month amount and building to a 6 month amount is going to set you up the best for being protected and staying on top of your finances.

Save Money for Miscellaneous Expenses

Saving money for specific expenses that come along only after 6 months or more of time will prepare you for them.

Certain expenses such as the following:

  1. Dentist Visit
  2. Tire Replacement
  3. Car Registration

Setting aside some money every month for each of these expenses is going to leave you prepared for them in a big way.

Miscellaneous expenses have a way of throwing people out of whack because they seem to come out of nowhere.

But if you have saved a specific amount each month for each miscellaneous expense, then will have a much better chance at handling these semi-regular costs.

The best way that I have found to save up enough money each month for these expenses is by taking each expense total and dividing it by the number of months before it is expected to occur.

$150/12 = $12.5 Monthly Dentist Expense

If a dentist visit is once a year and costs $150, then dividing this total by 12 will give you the amount that you need to save each month to be prepared for this expense.

If you save $12.5 each month for the dentist expense for 12 months, then you will have saved exactly what you will need to pay for the dentist visit.

Be Ready to Make Adjustments

There is some trial and error with creating an effective budget and most likely you will need to make adjustments to the budget periodically.

By accurately calculating the amounts for your expenses and post taxes income you will have vital information to manage money better.

Set yourself up for success by accounting for the miscellaneous expenses and you will have a significantly better chance at sticking with a budget.

Practice breaking down each bigger and more infrequent expense by the number of months before it is expected to occur and this will greatly help you be ready for your expenses.

I hope that this post was helpful and gave you some useful tips on how to create a good budget.

If you have a question, please leave it below and I will answer it to the best of my ability.

8 Replies to “How to Create a Good Budget – 8 Key Tips”

  1. Hi, I completely agree that budgeting one’s money is a vital step in the right direction. I like how you spell everything out so thoroughly, and make it easy for anyone to implement your advice. It took me many years to learn the value of living within my means, and the best way to achieve that is to have a detailed monetary budget such as the one you have clearly defined here. Thank you for sharing this extremely useful information. Tom

  2. Good budgeting is important for living. Everyone should be aware and learn about the basic calculation like expenses, gross income, etc. Thanks for this helpful article.

  3. Hi,

    Just wanted to say I really enjoy this site; you seem like a genuinely nice person. All that I can offer is my own experience with money…
    I worked really hard, finished college, med school, residency, and fellowship. I got into a relationship that wasn’t ideal because I didn’t want to be alone, and I wanted to be happy. Most of my life, I had lived pretty modestly. I began to make quite a bit of money, but I was ALWAYS at work, and I couldn’t enjoy life. I had to simply my life and try to just live life and not try and “force” it to work. I’m a lot happier now with less material possessions.
    That being said, we all need a certain amount of money to live. I like that you have very practical approaches to living and finance that don’t necessarily focus on the sheer amount of money one makes. All the money in the world is pointless without time.
    Good luck with everything; I’ll check this site periodically for tips because I’m sure I’ll need them!

    Ian

    1. I am very happy that you liked this site!
      Sounds like you have achieved a lot and worked really hard.
      I really try to focus on the practical approaches to living and finance that aren’t necessarily focused on the sheer amount of money a person makes.
      Thanks for sharing your experience with money!

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