How to Create a Personal Budget – An Easy Guide

Ever wonder where all your money disappears by the middle of the month? You’re not alone. Many people find themselves asking, “Where did it all go?” only to realize they’ve been spending without a plan. This is where budgeting comes in. 

A personal budget is a tool that helps you take control of your finances, ensuring every dime you earn has a purpose. When you create a personal budget and stick to it, you can stop the cycle of living paycheck to paycheck and start working toward your financial goals.

This guide will walk you through six easy steps to create a personal budget and show you why budgeting is so important.

6 Steps to Effectively Create a Monthly Budget

Creating a budget is quite straightforward once you know and understand the steps to follow. Below are the steps involved:

1. Calculate your monthly net income
2. Track your expenses
3. Set realistic financial goals
4. Choose a budgeting strategy
5. Adjust your spending habits
6. Review and adjust your budget as needed

Now, let’s take each step one after the other. 

1. Calculate Your Monthly Net Income

Your net income is the total amount of money you earn after taxes and deductions. It’s the starting point for any budget because you can’t plan your expenses without knowing how much you have to work with.

How to calculate it:

• If you’re an employee on salary, check your paycheck for the amount you take home after taxes.
• If you’re a freelancer or have irregular income, average your income from the past 3–6 months to get an estimate.

For example, if your monthly net income is N250,000, this is the amount you’ll plan your budget around.

2. Track Your Expenses

You can’t control your spending if you don’t know where your money is going. Tracking your expenses helps you identify spending habits and areas where you might be overspending.

Steps to track your expenses:

1. List all your expenses: Write down everything you spend money on such as groceries, rent, transportation, subscriptions, eating out, etc.
2. Categorize your expenses: Divide them into fixed expenses (like rent and utilities) and variable expenses (like entertainment and dining out).
3. Calculate your total expenses: Add them up to see how much you’re spending each month.

If, for instance, your expenses total N280,000 but your net income is N250,000, you’re spending more than you earn, something you’ll need to address in the next steps.

3. Set Realistic Financial Goals

Creating a personal budget isn’t just about cutting back, it’s about working toward something meaningful. Setting financial goals gives you a reason to stick to your budget.

Your goal could be short-term term like saving N100,000 for new clothes in three months. It could also be long-term term like building an emergency fund with three months’ worth of expenses or paying off a loan in a year. 

When setting your goals, be specific and realistic. For example, if you want to save N100,000 in three months, your goal would be to set aside N33,300 per month.

4. Choose a Budgeting Strategy 

There’s no one-size-fits-all approach to budgeting. When you’re trying to create a budget, the key is to pick a strategy that works for your lifestyle and financial goals. Some popular budgeting strategies include:

• 50/30/20 Rule: Allocate 50% of your income to needs, 30% to wants, and 20% to savings or debt repayment. For instance, if you earn N250,000 per month, you’d spend N125,000 on needs, N75,000 on wants, and N50,000 on savings or debt.
• Zero-Based Budgeting: Every dollar of your income is assigned a job, so your income minus expenses equals zero.
• Envelope System: Use physical envelopes or digital categories to set spending limits for each expense category. You could also use gift cards to budget as an alternative to envelopes. 

Once you’ve decided on the best budgeting strategy for you, the next thing is to draw up your budget plan. Based on your goals and budgeting strategy, allocate an amount to your monthly expenses. 

5. Adjust Your Spending Habits

Once you’ve outlined your budget, it’s time to make adjustments to stick to it.

How to adjust:

• Cut back on non-essential expenses: For example, instead of dining out three times a week, reduce it to once a week.
• Shop smarter: Look for deals, use coupons, or buy in bulk for groceries.
• Cancel unused subscriptions: Check your bank statement for subscriptions you no longer use and cancel them.

Take it easy on yourself and know that adjustments don’t have to be drastic. Small changes can free up money to help you achieve your financial goals. 

6. Review and Adjust Your Budget as Needed

When you create your personal budget, it doesn’t end there. A budget isn’t permanent, it is subject to changes. Your monthly budget should evolve with your financial situation. Reviewing it regularly ensures it still works for you.

When to review your budget:

• At the end of each month see if you stuck to your plan.
• When your income changes, such as getting a raise or losing a job.
• When your expenses change, like taking on a new subscription or paying off debt.

For example, if you overspent on entertainment the last month, adjust your budget to either allocate more for that category or find ways to cut back.

Why is Important to Create a Personal Budget?

It is important that you create a personal budget for various reasons. A budget is not just numbers on paper or a spreadsheet or screen, it’s a tool for financial freedom. Here’s why it matters:

1. Helps you control your money: It ensures your money is being used to meet your needs and achieve your goals.
2. Reduces wasteful spending: Tracking expenses highlights areas where you can cut back.
3. Helps you pay bills on time: With a plan in place, you’re less likely to fall behind on payments.
4. Builds savings: Whether for emergencies, vacations, or retirement, budgeting helps you save.
5. Reduces financial stress: Knowing where your money is going builds confidence and reduces anxiety.

Frequently Asked Questions About Budgeting 

1. How do I create a budget for myself?

Follow the steps outlined in this guide to create a personal budget: calculate your income, track expenses, set goals, choose a strategy, adjust your spending habits, and review your budget regularly.

2. What is the 50/30/20 rule?

It’s a budgeting method that allocates 50% of your income to needs, 30% to wants, and 20% to savings or debt repayment.

3. How do you write a personal budget plan?

Start by listing your income and expenses, then divide your money based on your financial goals and preferred budgeting strategy.

4. How can I budget money on low income?

Focus on covering essentials first, cut unnecessary expenses, and look for ways to make more money, like freelancing, crypto trading, or trading gift cards.

5. How do I budget as a couple or family?

Communicate about financial goals, pool your income, and create a joint budget that accounts for shared expenses and individual needs.

Conclusion

Creating a personal budget may seem overwhelming at first, but it’s one of the best steps you can take toward financial stability. By tracking your income and expenses, setting realistic goals, and choosing a budgeting strategy that fits your lifestyle, you’ll gain control over your money and work toward your dreams.