What is the first step in establishing a budget?

The first step in establishing a budget is analyzing income. This foundational step involves assessing all sources of income, including salaries, wages, bonuses, and any other earnings. Understanding how much money is coming in allows individuals to have a clear picture of their financial situation and informs the subsequent steps in the budgeting process.

Once income has been analyzed, it is easier to determine how to allocate funds for necessary expenses and discretionary spending. This analysis is critical because it ensures that the budget is built on a realistic assessment of financial resources. Establishing spending limits, tracking expenses, and reviewing for adjustments can only occur after there is a good understanding of income. Having this knowledge helps to create a balanced budget that reflects both current financial realities and future goals.