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How to Create a Budget

Gain Financial Peace of Mind With Less Effort Than You Think


Woman doing bills on the sofa
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Don't think that because you rent your apartment or your finances are simple, you don't need a budget. Nearly everyone can benefit from a budget. Creating a budget is really about keeping tabs on your money and knowing what your limitations are when it comes to expenditures. Whether you're trying to climb out of debt or deciding how to enjoy a surplus, a budget puts you in control.

Plan for Apartment Living

If you're looking for an apartment, consider these points when creating your budget:

  • Follow the "one-third rule." Try to budget no more than a third (33.3%) of your net income on rent. Your net income is how much you make after taxes, or your take-home pay. Many landlords set their income requirements as a percentage of gross income, which means you may qualify for an apartment if the rent is a little more than a third of your take-home pay. Using your net income, however, is more helpful in determining what you really can afford (as opposed to what you might qualify for). If you want to have more money available for other expenses, try to find an apartment for a rent that's closer to a fourth (25%) of your net income.

  • Save by sharing. It's hard to bargain with a landlord when it comes to the rent, but you can lower your rent payments considerably by renting with a roommate or two.

  • Anticipate initial rental expenses. You may need to pony up the first month's rent, a security deposit, a broker's fee, and possibly the last month's rent before you even move into your new place. Don't leave these important expenses out of your budget.

Make Your Budget Effective

You don't need to be a math or economics whiz to create an effective budget. It does require some time, motivation, effort, and follow-through, but once you've created your budget and gained some financial peace of mind, you'll probably find it was well worth it.

Follow these steps to create an effective budget:

  1. Use software or a worksheet. More and more people are turning to personal finance software to help them create a budget. Here are some top software picks to consider. If you prefer not to use software, create a worksheet (on your computer or the old-fashioned way) that lets you outline your income and expenses and paint a full picture of your monthly finances. Here's a worksheet you can adapt for your budget.

  2. Get your documentation together. Creating a budget lets you know how much monthly income and expenses you have, and so your budget is only as complete as the information it contains. Take the time to find pay stubs, bank statements, utility bills, auto and renter's insurance bills, and any other documentation that can help you determine your income and expenses.

  3. Enter your income and expenses. Refer to the documentation you gathered and enter your monthly income into your budget. To determine the amount of your monthly expenses, make a list of what you spend your money on each month and compare it to recent credit card bills and receipts. If you use software to create your budget, it will guide you through this step.

  4. Adjust your expenses, if necessary. Total your income and expenses -- hopefully, you'll find that your income is higher. If so, decide what to do with your extra income, whether it's putting more money into savings or paying off a credit card. If your expenses are higher, decide which expenses you can lower, if not eliminate. For example, you might cancel some magazine subscriptions or limit the number of times you visit restaurants or go to the movies.

Review Your Budget Each Month

Once you've completed the steps outlined above, you've successfully created your budget. However, your work isn't quite done. Revisit your budget each month to see if you've stayed on track or if you need to make further adjustments. If your financial picture changes significantly -- for example, you get a pay raise or you get laid off –- you'll need to update your budget to reflect your new circumstances.

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