Budgeting is important for everyone, regardless of income level or life stage. But it’s especially important for college students and young professionals, as you begin managing your life and finances separate from your parents. 

Read on to learn more about the importance of fiscal responsibility and the steps to creating (and sticking to) a realistic personal budget.

Why a budget is so important

If you’ve ever heard it said that someone “lives beyond their means,” then you’re probably familiar with a common problem in today’s society. Too many people find themselves living in a home they can’t afford, drowning in credit card debt, or living paycheck to paycheck with no savings to fall back on. 

According to Investopedia, the average credit card debt per household reached $5,525 in 2021. That doesn’t even take into account the significant student loan debt many young people have when they’re starting out. 

Not all consumer debt is necessarily bad, as long as you’re using credit wisely and taking it into account as part of a well-planned budget. A budget can make it easier to pay your bills as you also increase your savings and plan for future purchases, like buying your first home. Following a budget can put you in a stronger financial position to build the kind of life you want for yourself.

7 steps to creating your budget

Building a budget isn’t that difficult, yet many people fail to put in the effort to create one. By looking at your financial situation and documenting your expenses, you’ll have a much better picture of what you truly can and cannot afford. A budget also helps you set more realistic goals, and tells you exactly how much you’ll need to earn and save in order to meet them. 

Here are seven steps to developing a smart, realistic budget that you can stick to:

Make a list of your total income

If you don’t know how much money you have coming in, it’s impossible to know how much you can actually afford to spend. 

Start by determining how much money you earn each month. This includes your salary, any income from freelance or gig work, alimony payments, etc. Any money you have coming in regularly should be accounted for.

2. Make a list of all your expenses

Keep track of all the bills you have coming in each month to ensure you have enough money budgeted to cover them. 

Some of those expenses will be clear and recurring, like rent and utilities, but don’t forget to include all the extra expenses, too, like groceries, meals, medical expenses, cell phone, subscriptions and memberships, etc. (Yes, Netflix is an expense — unless you’re currently “borrowing” your account from a friend.) Anything you can anticipate spending each month should be noted when developing your budget.

Here is a quick overview of expense categories and the most common types of expenses:

• Fixed expenses: rent, insurance, utility bills, cell phone, subscriptions
• Variable expenses: Gas, groceries, clothes, food and drinks, entertainment
• One-time expenses: Car repairs, medical bills, travel expenses
• Savings: Don’t forget to feed the pig! Put aside money each month for an emergency fund as well as long-term investments

3. Review your past 3-12 months of spending

Assessing your spending habits will help you understand where and how you typically spend your money. Before you start trying to cut your spending, spend some time tracking and evaluating all your expenses. You may notice some patterns and can categorize where most of your money is going. 

For example, if you’re getting Starbucks every morning on the way home from the gym and ordering takeout several times a week for lunch, you might find you’re spending a larger portion of your monthly income on food and drink than you realized.

By calculating how much money you’re actually spending and where it’s going, you can find easy ways to cut costs with just small changes — like making coffee at home or packing a lunch a few days a week.

4. Meet your basic needs first

Identify any recurring, fixed expenses that cannot be removed from your budget. (i.e., rent, car payment, utilities, insurance, phone, internet, etc.) These items need to be budgeted for before you start adding in nonessential expenses, like money for a personal trainer or weekly manicure. While you probably can’t eliminate most (or any) of your essential expenses, there are ways to reduce their cost, as we’ll touch on in step 6.

5. Move on to the variable items

Some expenses will vary and be more difficult to anticipate. As you look at your variable expenses, it may seem daunting to estimate how much you’ll end up spending. This is why it’s so important to look back at your previous spending. 

After analyzing past patterns, calculate an average amount to incorporate into your budget. So, if you look at your grocery bills over the last few months and find you’re spending between $250-$300 a month on food, set $300 as your grocery budget to start. 

Account for the higher amount in your budget, but remember you can always start shopping around for sales or using coupons to get that down to a lower amount. That’s what is so helpful about seeing the true amount of money you’re spending on something — it makes you think more carefully about your choices.

6. Categorize your spending and make smart cuts

Divide your spending into categories (e.g., housing, transportation, food, utilities, healthcare, personal, etc.). It can help to put it in a graph or chart, so you can visualize where most of your money is being spent.  

Consider areas where you can minimize or cut your spending. It might seem difficult to find ways to do this, but as you review the analysis of your spending habits, some areas will rise to the top. There may be opportunities to reduce some of your payments, even for essential expenses. 

Here are just a few examples:

• See what other options are out there for your cell phone or internet package or if another carrier is offering a better deal if you switch. 
• If you’re spending a lot of money on gas or Uber rides, see if there are some public transportation or carpool options you could take advantage of. 
• Is your rent a little higher than you’re comfortable with? Consider downsizing to a smaller place, or getting a roommate to share costs.

7. Be honest with yourself — and your budget

When creating your budget, be honest and realistic about your spending, otherwise, you’re setting yourself up to fail. 

A budget is only helpful if you can make it as accurate as possible and follow through with the commitment. Start small and slowly taper your extra spending to develop a budget you’ll be able to stick with. Be realistic so you can meet your own expectations and set out on the road to a financially healthy future.

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