The displeasing B-word – budget. Just like how most people don’t like being on a strict diet, many people don’t enjoy having a budget. Unfortunately, budgeting has been immersed in negative stereotypes.
For example, people that have a budget are seen as boring and lacking the joy of the here and now. They’re seen as financially restricted and without freedom to spend as they please.
However, this is far from accurate. In fact, budgeting doesn’t restrict your financial freedom, it supports it and helps it flourish.
Think of a budget as a financial plan that will help you achieve your goals and eventually reach financial freedom.
In this step-by-step ultimate guide, we will define what a budget is, how to create one, and provide you with several budgeting tips.
How to Budget Your Money
- Gather your financial paperwork
- Note your after-tax income
- Track your spending
- Calculate the difference
- Set your goals
- Choose a budgeting plan
- Create a spreadsheet
- Use a budgeting tool
- Adjust your habits if necessary
- Automate your savings
- Keep reviewing your budget
- Get help if needed
What is a budget?
A budget is a written financial plan for how you will spend and save your money each month. It will also show you how much money you make, and help you track what you’re spending it on.
Simply put, a budget will ensure you will have enough money every month for your needs and your wants.
For example, without a budget, you might not have enough money left over after expenses to save and invest. Or worst case scenario, you might even run out of money before your next paycheck and not be able to afford food.
Why do I want a budget?
If you’re not motivated to start a budget, it’s important to establish your “why.” Even if you do start a budget, you won’t be likely to stick to it without knowing your reasons for doing so.
Perhaps you have a habit of buying impulsively and want to reduce your spending. Or maybe you have a lot of debt and are determined to become debt-free.
Whatever your reason for creating a budget is, having a very clear “why” will give you the focus and determination to follow through.
How to Create a Budget in 12 Easy Steps:
1. Gather Your Financial Paperwork
Before you start creating a budget, gather all your financial statements.
These include, but are not limited to:
- Bank statements
- Mortgage and auto loan statements
- Investment accounts
- 1099s
- W-2s and paystubs
- Recent utility bills
- Credit card bills
- Receipts from the last few months
Simply put, you want to have access to all information regarding your income and expenses. The more information you can work with, the better.
2. Note Your After-Tax Income
How much money can you expect to earn per month? The first step to create a budget is to determine how much money you make each month after taxes.
If your income is a regular paycheck in which taxes are deducted automatically, using your take-home pay (net income) is perfectly fine.
However, if your compensation varies, using an average of the last three months will work, but the more accurate the better. Also, do not forget to include other streams of income such as interest, dividends, rental income, alimony, child support, etc.
3. Track Your Spending
The next step is to put together a list of all the expenses you expect to have during a month.
Common expenses this list could include are:
- Mortgage or rent payments
- Loan payments (auto, student, personal, etc.)
- Insurance (Auto, home, health, etc.)
- Utilities (electricity, gas, water, etc.)
- Transportation costs (gas, bus fares, train tickets, etc.)
- Phone, cable, internet
- Savings (Roth IRA, high-yield savings accounts, etc.)
- Groceries
- Personal care
- Child care
- Subscriptions and memberships
- Entertainment
- Dining out
- Travel
- Miscellaneous
Use bank statements, credit card statements, and receipts from the last few months to identity all of your spending.
Once you have a list of your monthly expenses, start determining which are fixed and which are variable.
Fixed expenses
Fixed expenses are mandatory bills you can’t avoid that you pay the same amount for each and every month.
These fixed expenses include items such as:
- Mortgage or Rent payments
- Car payments
- utilities
- insurance
- Debt repayment
- Etc.
Variable expenses
Variable expenses are bills that are flexible and will change from month to month. For example, if money was tight, you could always drop paid entertainment and stop buying people gifts.
These variable expenses include items such as:
- Clothing costs
- Transportation costs
- Food
- Entertainment
- Gifts
- Etc.
4. Calculate the Difference
If your total expenses are lower than your income, you’re in a great starting position. You can put this extra money towards important categories in your budget, such as debt repayment or retirement savings.
On the other hand, if your total expenses are greater than your income, you’re overspending and need to make some financial changes. You basically have two options – spend less or make more money.
5. Set Your Goals
Following a budget isn’t just about math and numbers. It’s about living your best life by improving your financial situation.
Whether you’re paying off credit card debt, building an emergency fund, or paying off your mortgage, it’s important you set clear and precise budgeting goals.
Make sure to set both short-term and long-term goals. Your short-term goals should take less than a year to achieve, and your long-term goals should take more than a year to achieve.
For example, saving for retirement should be a long-term goal, while building a small emergency fund should be a short-term goal.
Make sure to always write down your financial goals somewhere so you can frequently review them and see the progress you have made.
6. Choose a Budgeting Plan
After creating and writing down your budgeting/financial goals, you need to choose a budgeting plan that will help you achieve them.
Every budget will cover your needs, wants, and savings. However, there is no shortage of ways you can approach budgeting.
Some approaches are very complex and detailed, while others are very simple and bare-bones. However, no budgeting method is better than the other. It simply comes down to finding the method that matches your financial goals.
The most popular budgeting plans are:
7. Create a Spreadsheet
Once you have chosen your budgeting method, it’s important you use a pen and paper (figuratively or literally, depending on your preference) to write down the numbers.
While this could be seen as outdated, creating a budget spreadsheet is a very important starting point whether or not you use a budgeting tool and regardless of what type of budget system you use.
There are many free budgeting spreadsheets you can use. Here are the best.
8. Use a Budgeting Tool
Note: TheDollarBudget is not an affiliate of any of these apps and this step is for informational purposes only.
If using pen and paper (or spreadsheets) isn’t your thing and you’re comfortable using third party tools to manage your finances, there are many excellent apps you can use to track your spending and create a budget.
These budgeting apps are:
9. Adjust Your Habits if Necessary
Now that you have set your goals, chose a budgeting plan, created a spreadsheet, and picked a budgeting tool, you need to adjust your habits if necessary to start moving towards your financial goals.
10. Automate Your Savings
To help you stick to your budget, automate as much of your finances as possible. The less effort on your part to put money towards savings, the better. An online support group or an accountability partner can help too. They will hold you accountable for financial decisions that are bad for your budget.
11. Keep Reviewing Your Budget
You’re income, expenses, and priorities will change over time. It’s important that you regularly review your budget to make sure your staying on track and making necessary adjustments.
I recommend that you review your budget at least once every two weeks. This will help you constantly track your spending, know what needs to change, and whether or not your sticking to your budgeting goals.
12. Get Help if Needed
If you’re still unsure or uncomfortable with the idea of starting and following a budget, there is a lot of free help available.
For example, moneymanagement.org is a nonprofit that offers free budget counseling to anyone that is struggling to budget.
You can find a review of Money Management International here.
How to Use a Budget
Once you have created a budget and done everything creating it entails, it’s important you know how to use your budget.
After you set your budget up, monitor it and continue to track your expenses in every category, ideally once a week. Your budgeting spreadsheet and your budgeting app can also be used to track and record your expense and income totals.
Keeping track of how you spend your money throughout the month will help prevent you from overspending. It will also help you identify problematic spending patterns and unnecessary expenses.
Spend a couple minutes everyday recording your expenses, rather than waiting until the end of the month.
As you continue using your budget, pay attention to how much you have spent in each category.
Once you have reached your spending limit, you should stop that type of spending for the rest of the month. In the worst case scenario, you may have to move money from one category to another to cover additional expenses.
Your overall goal of using a monthly budget should be to keep your expenses lower than you income for the month so you can progress towards achieving your other financial goals.
11 Budgeting Tips:
1. Budget for the Most Important Categories First
Of all your budget categories, savings is the most important and should be at the top of your list. The next four most important categories are shelter, food, utilities, and transportation.
Once you have budgeted your true necessities and they are taken care of, you can then budget for the rest of your categories.
2. Budget to Zero
Regardless of the budget strategy you choose, I highly recommend you always budget to zero. Budgeting to zero means at the start of the month, you’re making a plan and giving every dollar a name. This just means that your income minus all your expenses equals zero.
Simply put, budgeting to zero means you have a plan for every dollar you will earn that month.
You can find a complete guide for budgeting to zero here.
3. Use Cash for Specific Budget Categories
Is there a budget category you’re constantly overspending in? Cash out the category and use the envelope system to prevent it from happening again.
Once the cash runs out of the envelope, stop spending money in that category. The envelope system will work as an additional accountability partner.
4. Use a Budget Buffer
You will most likely have unexpected expenses throughout the month, so it’s important to have a miscellaneous category in your budget.
This way, when something comes up, you can cover the expense without having to take away money from your emergency fund – which is intended for true emergencies only.
If you notice an expense that frequently comes up in this category, you might want to move it to a permanent spot in your budget.
5. Trim Your Budget
If you’re having trouble spending less than you make, don’t be afraid to make some budget cuts. You can save money quickly by eating out less, shopping for clothes at thrift stores, and canceling subscriptions.
Keep in mind that your budget cuts don’t have to be permanent. You can always reevaluate later down the road and make adjustments.
6. Pay Off Debt
If you have debt, becoming debt-free should be your top financial goal. Whichever budgeting plan you’re using, use it to get rid of your debt as fast as possible.
7. Stick to a Schedule
If budgeting is part of your monthly routine, why not pick specific dates to pay certain bills? You can set up auto drafts out of your checking account through your bank to pay bills or even contribute to savings.
You can also set certain dates that you go shopping. Knowing when and where you’re going shopping, will reduce stress and prevent potential problems from occurring.
8. Every Month is Different
Some months you’ll be saving for holidays, birthdays, and traveling. Other months you will have to budget for for things such as vehicle maintenance or back-to-school supplies.
No matter what the rare occasion is, make sure you have factored these expenses into your budget.
9. Budget Together
If you’re married, you and your spouse should always be on the same page financially. You should set goals together and dream about what your financial future will look like.
When you review your budget every month, sit down and do it together.
10. Don’t Compare Yourself to Others
Never compare your financial situation to someone else’s. Comparison will only rob you of your paycheck and your joy. If anything, compare your financial situation to where it was a year ago and then keep moving forward.
11. Be Easy on Yourself
It will most likely take you several months to get in the groove of budgeting, so don’t be hard on yourself when you’re just starting out. You won’t be an expert budgeteer the first or second time, but you will be eventually!
How to Make a Budget FAQs
What Are the 3 Rules of Money?
The three golden rules of money are:
- Spend less than you earn: This is something you may hear over and over again and for good reason. Spending less than you earn simply means living within your means. If you spend less than you earn, you won’t face some of the financial problems many others do.
- Know where your money comes from and where it goes: You should always be aware of what is happening with your money. Track your spending so that you know where it’s going. You should also have a well-rounded understanding of how you get your money and how it can work for you.
- Invest a minimum of 10% of your income: The third golden rule of money is to invest a minimum of 10% of your income wisely. A wise investment should give you capital growth as well as income. You should also have a thorough understand of what your investing in, before doing so.
What Is the 50 20 30 Budget Rule?
The 50/30/20 budgeting rule is a budgeting system in which 50 percent of your take-home pay goes towards your “needs,” 30 percent goes towards you “wants,” and the remaining 20 percent goes towards your savings.
To successfully use the 50/30/20 budgeting rule, make sure you have figured out what is truly a “need” and what isn’t.
What is the Best Budgeting App for Personal Finance?
The three best budgeting apps for personal finance are Mint, Quicken, and You Need a Budget.
How do I Stop Living Paycheck to Paycheck?
To stop living paycheck to paycheck:
- Get on a budget
- Build an emergency fund
- Pay off your debt
- Sell stuff you no longer use
- Start a side hustle
- Live below your means
- Remember your why
If you follow these steps, it will only be a matter of time until you’re no longer living paycheck to paycheck.
Final Words
Once you have finished creating your budget, the next step is to stick with it. To do so, find multiple ways to hold yourself accountable.
For example, you should find an accountability partner or join an online support group, use the envelope system, or even set reminders with your bank to remind yourself when you have reached a preset spending limit for each budget category.
In an ideal situation, you should use all three methods to hold yourself accountable.
You should also try to track all your expenses in your spreadsheet or budgeting app every time you make a purchase. If you share expenses with someone else, make sure you’re both on the same page.
