Creating a budget can help you cover your bases, afford fun things you’d like in the present, and be better prepared, financially, for the future. In fact, 85% of people who budget say¹ the process helped them either get out or stay out of debt. 

With the holidays behind us, there’s no time like the present to take stock of your spending and saving, and make any necessary adjustments to put you financially ahead of the game in the new year. No matter what the year ahead brings, creating a budget that you can realistically stick to is a great way to start. Here’s a rock-solid way to come up with yours. 

Get to know your disposable and discretionary income

Whether you use an online tool or an app, an Excel spreadsheet or simple pencil and paper, the first step to creating a solid budget is understanding how your income and spending are related:

• Determine your disposable income: Start by gathering how much money you have coming in from all sources each month, including take-home pay (salary minus taxes) from however many jobs you have, and any other sources of income.  

• Find out where your money is going: Next, create a new list with two columns. In the first, list your fixed or essential expenses. These expenses include things you must pay for every month, like rent or mortgage, cell phone, transportation costs, groceries, insurance, utilities, etc. In the second column, gather your flexible or lifestyle expenses, including items that fall into categories like entertainment, clothing, subscriptions, or memberships. These things are typically not necessary for your day-to-day life, no matter how much you enjoy them. 

• Calculate your discretionary income: Subtract your fixed or essential expenses (the amount in your first column) from your disposable income to get an amount that’s called your discretionary income. This is the amount of money you have left to spend on the items in your second column, as well as other financial goals.

Take stock of your other financial goals 

Before using all your discretionary income to pay for the lifestyle items in your second column, consider your overall financial goals and how they may have changed over the past year. Maybe you had a baby and would like to reconsider your living quarters, buy a new car, or start saving more money. Some other financial considerations that may impact your budget include:  

• Emergency savings: If you haven't already, experts recommend saving three to six months' worth of fixed or essential expenses (more doesn't hurt, especially in volatile economic climates) in a savings account that's specifically intended to cover any unforeseen emergencies that may crop up. 

• Insurance: If you have a full-time job, your health insurance is likely partially covered by your employer, with the amount you’re responsible for coming out of your paycheck automatically each month. If you need additional healthcare, or if yours isn’t covered by your employer for whatever reason, research your options and factor this additional cost into your essential expenses above. Also, consider whether you’d like additional policies, like life insurance or short- or long-term disability, depending on how your needs have changed over the year. A new year is also a great time to check in on car and homeowner’s or renter’s insurance policies to make sure they are still a good financial fit. 

• Retirement: Like health insurance, if you have an employer-sponsored retirement plan, the amount you pay into it each month likely comes out of your paycheck automatically. Depending on your retirement goals and age, as well as if you’ve recently changed jobs, you may want to consider adjusting the amount you save for retirement. Make sure to add this to your essential column if you’re paying it out of pocket, or adjust your disposable income if you’re altering an employer-sponsored plan.

• Debt repayment: You might be making debt repayments — like student loans —automatically each month already. If not, or if you have other debts, like credit card, that need to be paid off, revisit your list of lifestyle expenses to see where you can cut back to help pay down (particularly high interest) debt more quickly.  

Pick a budget tracking method

With your expenses and goals in mind, find the budgeting method that's best for you. Some financial experts recommend using the 50/30/20 rule and keeping 50% of your income for your needs, 30% for your wants, and 20% for your savings and debt repayment. The envelope method — where you assign spending categories to individual envelopes and contribute a certain amount of cash to be used for each month — is another way to keep track of expenses for people who prefer using cash or like a visual representation of their money. 

Make things automatic

Once you know how much you’ll be spending on each item in your budget for the month, approach any online payments with a “set it but don’t forget it” mindset. Set up direct savings and automatic payments as much as possible to save yourself from remembering to manually go in and complete these tasks. This helps you avoid costly late fees and ensures you aren’t tempted to spend the money elsewhere. 

Practice active management 

Just because the budget you set up works for you at the beginning of the year, doesn’t mean it’ll work for you once the year gets rolling. Perhaps your savings interests change (let’s say interest rates come down and you’d now like to actively start saving for your first home), or you meet one of your financial goals (like paying off one of your debts) and find yourself suddenly with excess discretionary income. Whatever the reason, life happens, and setting a calendar reminder to revisit your budget every few months throughout the year can help ensure your budget stays on track to match your lifestyle. 

Rather than thinking of budgeting as a resolution you’re setting for the new year, think of it as a long-term system you’re putting into place to help you reach your financial goals. With the right mindset — and the right budgeting tools — you can tackle your fiscal ambitions with ferocity, both for next year and for all the years to come after.

Get tools for budget building and more from your local, community bank — we’re built to support you.

1. “Americans Are Budgeting More Than Ever,” Debt.com, accessed January 30, 2023, https://www.debt.com/research/best-way-to-budget.