By Niccole Schreck
Creating your first budget can be daunting, but it's extremely important when you're moving out on your own for the first time. If you bite off more than you can chew, you may not have enough money to buy yourself something to chew on. Here are step-by-step instructions to help you create your first budget:
1. Determine your net income. The first step is figuring out your net income, which is not the same as your salary. Your gross income is what you earn; your net income is what you end up with after taxes, health insurance, Social Security, 401(k) deductions and anything else that comes out of your check. This is the amount of money you'll have to work with when you're budgeting.
2. Make a list of monthly payments and expenses. Now the real work starts. Make a list of all of the fixed payments you absolutely have to make each month, including gas, electricity, renters insurance, loans, credit cards, car payments and car insurance. These costs are less flexible than others, so you'll want to form your budget around them.
Next, write down all of your anticipated expenses. These include basics that you spend money on each month such as cable, Internet, food, household items, pet supplies, gym membership, prescriptions, clothing, hobbies and activities. This is where your online bank account can be an excellent resource. Scroll through your spending over the past few months to ensure you have all of your bases covered with a comprehensive spending list. When you're figuring out a budget, it's important to be honest and realistic. Otherwise, your budget loses its purpose. Sure, you keep telling yourself not to spend $100 every month on your wardrobe, but if that's what you're spending, it needs to be in your budget.
3. Establish your rent budget. After you've budgeted for fixed costs and the basics, it's time to determine what you can afford for rent. A general rule experts recommend is to spend no more than one-third of your net income on rent per year. However, like every general rule, there are many exceptions. If you don't think you can afford to spend a third of your net income on rent, don't do it. Figuring out after the fact that you can't afford your monthly rent is going to cause a lot of stress for you, your roommates and your landlord. When it comes to making monetary promises, it's always better to be safe than sorry.
4. Save for emergencies and retirement. It sounds like a pain, but it's important to put a portion of every paycheck into your savings account-preferably 10 percent of your net income. Even if things are tight and you can only put a small amount away each month, it's worth it. You will thank yourself in the future when your car breaks down, you need a root canal or you get laid off. Plus, retirement may seem far off now, but your 20s are the perfect time to begin saving because you will accumulate interest over your lifetime.
5. Make tweaks and stick to it. This is the most important step in the budgeting process: You must stick to it! Budgeting isn't a one-time thing; it's a life-long process. Review your budget regularly to make sure you're staying on track and make any necessary tweaks.
Congrats: You are now ready to tackle world on a budget. If you want to move beyond the pen and paper approach, there are lots of websites that can help figure out a budget and track your spending habits.
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