Financial Literacy

This is the presentation, scroll down for the article.

How to Create a Budget in Six Steps

You may not know this about me, but outside of being an Instructional Designer and Developer I have an unquenchable thirst for learning about personal finances and economics.

And as you know, COVID has had a major impact on the economy and how people are thinking about money and personal finance. Sooo, I’ve decided to a personal finance series. This is one of three!


Step One: Get Your Paperwork in Order

The first and often most overlooked step when creating a budget is to gather all of the documentation you have on your finances (as needed).

This will include anything that can provide information on your expenses.

Potential Documentation

  • Bank Statements
  • Investment Accounts
  • Bills
  • W-2s or paystubs
  • 1099s
  • Receipts
  • Car loan statements
  • Mortgage loan statements
  • Any other documentation that will provide an overview of your expenses.

Step Two: Calculate Your Monthly Income

Surprisingly, a lot of people don’t know exactly how much money they bring in monthly.

This is a key step because you can’t budget if you don’t know how much you’re making.

Be sure to capture all sources of income so you have an accurate picture of what you make each month.

What Are You’re Income Sources?

  • Full-time or part-time job(s)
  • Salary or hourly (does it vary?)
  • Freelance income?
  • Business income?
  • Assets?

Step Three: Create a List of All Your Expenses

The key to creating a budget that works is knowing exactly how much you have coming in AND going out.

You should create a comprehensive list of all expenses that you pay each month (include estimates of non-budgeted expenses like going out and shopping).

This is critical and you will not be able to budget correctly if you don’t have an accurate list.

There are many software options to help track expenses (i.e. Microsoft Excel, Quickbooks, Wave, etc).

List of Potential Expenses

  • Mortgage or Rent
  • Car payments (and other transportation)
  • Insurance
  • Groceries
  • Utilities
  • Phone bill
  • Retirement savings
  • Regular savings
  • Personal care
  • Eating out
  • Student loans
  • Credit card bills
  • Gas
  • Health bills

Step Four: Determine Fixed & Variable Expenses

A common mistake when calculating expenses is not accounting for whether they are fixed or variable.

For instance, things like groceries, gas, going out, health expenses and personal care are common expenses that vary each month.

Sometimes you spend more or less depending on what you are doing that month, or if there is an event, etc.

So, leave some wiggle room for these types of expenses so you aren’t shocked by anything that comes up.

Potential Variable Expenses

  • Groceries
  • Utilities
  • Personal care
  • Eating out
  • Gas
  • Health expenses

Step Five: Compare Income and Expenses

The hard work is done now. Next you need to compare your income with your expenses. When doing this you may or may not experience a strong emotional response to your financial reality.

Everyone has a different reaction when first coming to terms with their finances. Some folks can become happy, sad, angry, shocked, have a bout of panic or anxiety, discouraged, empowered, etc…

The point it is to accept the reality for what it is and see it as an opportunity to make your money do what you want it to do. No matter the reality, you have already made progress.

And remember, creating a budget is the first step towards financial freedom and having control over your financial future.

Adjust Your Budget to Make it Work

Here’s the part where a lot of people have trouble. Cutting or raising your budget in certain areas.

For instance, it can be hard to reduce your going out budget so that you can save more. Logically it sounds easy but as we all know, we are both logical and emotional.

So if you have strong emotional response, make adjustments that push your boundaries but don’t destroy them.

Example of adjusting a budge (over three months)

Tips On Budgeting

The key to making a budget work is consistency.

Make sure to follow your budget as closely as possible.

Don’t make excuses for yourself to break your budget.

Update your budget twice a month minimum to keep track.

Learn to love the freedom that comes with the basic restrictions of budgeting.

Financial security will show itself in due time. Patience is key.

Happy Budgeting!



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