Budget Guide: 5 Steps to Create a Budget

Ready to take control of your finances? Then it’s time to budget! 

Creating a budget is the cornerstone of financial freedom – and it’s easier than you might think. No matter which type of budget you choose, the key to effectively managing your money starts with keeping track of how much you earn and spend. 

Do you need to budget your money? 

Simply put, a budget is a financial plan that tracks the money that goes in and out of your household. Creating a budget allows you to view your expenses, note your spending habits, and set savings goals. 

There are many budgeting strategies out there, so it’s important to choose one best suited to your financial situation, needs, and goals. You also want to use the method you’re most likely to stick to since maintaining a budget is just as important as creating one. 

Download our FREE Budget Tracker

5 steps to creating a budget 

Whether you’re revisiting the idea of budgeting or learning how to create a budget for the first time, there are a few steps you can follow to get started. 

1. Visualize your long-term financial goals 

Thinking about your long-term financial goals can help you determine the right budget plan and stay on track. So, sit down and ask yourself what financial goals you want to achieve. 

Some questions to ask yourself include: 

• What financial goals do you want to achieve in the next 5 to 10 years? 
• Would you like to save for a mortgage down payment? 
• Do you want to go back to school? Or are your kids going to college soon? 
• Are you thinking about going on a dream vacation? 
• Do you have a lot of debt to pay off? 

If it helps, create a collage of your long-term goals and keep it in a place where you can see it every day. Think of it like a vision board and use it as a motivator. 

2. Calculate your income 

Before creating budgeting categories, you need to know how much money you’re working with. Add the income you bring home from your regular paycheck and any side gigs to get your total after-tax income. Add your spouse or partner's income, if applicable. 

Other things to include in your budget’s income are any monetary gifts, bonuses, and tax refunds you receive. 

3. List your expenses 

Get in the habit of listing your expenses in a spreadsheet, mobile app, or physical notebook. Write down where the money went, the amount, and the date. You might also want to include whether the expenditure was necessary or an impulse buy. 

Be sure to note your regular monthly expenses, such as utilities, insurance, groceries, gas, and credit card bills. If you have any semi-annual or annual expenses, such as HOA fees or property taxes, divide the total amount by the number of months to get the monthly amount for your budget. 

4. Compare your expenses to your total income 

After finding your income and expense totals, it’s time to list them all together on one sheet. Plug in all the numbers and take an overall look. 

Do you notice any trends? Maybe you’re spending more than you’re bringing in. Maybe you’ve put some bills on auto-draft and forgot to list them with your expenses. 

Seeing your finances on paper helps you analyze your spending and saving habits, making it easier to see where you might lower your expenses. 

5. Create a spending budget and adjust it as needed 

With an idea of all your income and spending habits, you can assess where and how much of your money goes to each spending category. 

Subtract your necessities like your mortgage or rent, utilities, and groceries from your after-tax income. The remaining number is what you have left to spend on entertainment, gifts, savings, and other things. 

You can designate money from this remaining balance to each of these categories to ensure you don’t overspend. Then, you can adjust the amounts each month as you see fit. Maybe pull $10 from entertainment each month and designate it to your savings or move other amounts around as needed. 

3 popular budgeting methods 

50/30/20 budget 

This budgeting method may look complicated at first glance, but it’s actually a simple way to manage your money. 

The 50/30/20 rule divides your after-tax income into three categories: 

• 50% for necessities like utilities and groceries 
• 30% for wants 
• 20% for savings and debt repayment 

This budgeting method helps you spend within your means and avoid overspending on non-essential items. 

Envelope budget system 

The envelope budget system is a great way to designate cash to specific categories like: 

• Groceries 
• Entertainment 
• Gas 
• Gifts 

To start a monthly envelope budget, you’ll want to take a look at your spending. 

See how much you typically spend on these categories per month. From here, decide on designated amounts that you can put toward each of these categories based on your spending habits. 

Withdraw the money you need and put those designated amounts into separate labeled envelopes. Repeat this process for each of your categories. 

Let’s say you spent an average of $200 on gas over the past few months. You’ll withdraw $200 and put in an envelope labeled “gas.” This cash is how you’ll pay for fuel-ups for the next month. The idea is to give you a spending limit that keeps you from dipping into your credit card, checking account, or savings. 

Zero-based budget 

Zero-based budgeting is a more complex strategy where you assign every dollar you earn a “job.” 

First, create categories for expenses and savings. Then, ensure each dollar you earn has a purpose and goes into one of those categories. If done correctly, once you’ve divided your income into categories, you should be left with zero unspent dollars. 

Since this strategy leaves no room for overspending, it can be helpful for anyone who has trouble sticking to a budget. If your income fluctuates from month to month, however, you might have trouble sticking to a zero-based budget. 

➢RELATED: How to Create a Budget With Biweekly Paychecks

Are budget apps worth it? 

If you’re learning how to create a budget, using budgeting apps may be a good option for you. For budgeting apps to work effectively, you’ll need to use them consistently, and you’ll have to be honest with yourself about your spending. A lot of it depends on how disciplined you are with yourself. 

Pros 

• Easy tracking and access since it’s on your phone 
• Great visual representations of your spending 
• Apps typically let you set financial goals and give advice on how to reach them 
• Some apps let you to link your bank accounts, providing automatic syncing 

Cons 

● Many budgeting apps charge subscription fees 

● Learning how to use these apps can be difficult 

● Privacy issues can be a concern if you link your bank accounts 

If you’re interested in going down the budgeting app route, some free options you can try out include: 

• Rocket Money 
• Albert: Budgeting and Banking 
• EveryDollar 

How to budget and save money 

If you’re looking to use a budget to reduce spending and save money, there are a few things you can do. 

Cook meals at home 

Many people enjoy going out to eat, making restaurant meals a primary category on their budgets. But if you’re going to restaurants multiple times a week, you can easily spend hundreds of dollars that you could use elsewhere. 

If you want to cut back on this spending, you might want to start cooking more meals at home. 

Reduce your subscriptions 

Do you know what you’re paying for when it comes to subscriptions? Review your monthly subscription fees and ensure they fit into your budget. 

Subscriptions might seem like small fees at first, but they can add up quickly. 

Limit impulse purchases 

It can be tempting to buy things you want immediately, leading to overspending. If you want to start saving money, you’ll need to reduce your impulse purchases and put the money toward savings instead. 

A coffee or lunch here and there is fine, as it's important to treat yourself on occasion. The goal is to reduce big, unnecessary purchases that can blow your budget. 

Tips for sticking to your budget 

Track your spending regularly 

One of the best ways to stay on budget is to keep track of your spending. This means knowing where your money is going and how much you're spending on each expense. 

Whether you download our budget tool, track your spending on paper, or create your own spreadsheet, make sure to update it regularly so you always have an accurate picture of your finances. 

Set realistic goals 

The last thing you want to do is set yourself up for failure. Try to set realistic goals when budgeting so you stay motivated by your small wins. 

For example, let’s say you keep going over your “dining out” budget by at least $20. To resolve this, you want to curb your habit of buying a latte on the way to work every morning. You might be tempted to say you’ll never stop by the coffee shop again — but is that realistic? Instead, set a goal that you’ll only frequent the coffee shop twice a week. 

Plan for emergencies 

No matter how disciplined you might be at budgeting, unexpected expenses will come up. That's why it's important to have an emergency fund to cover these costs. 

If you don't already have an emergency fund, start setting aside a small amount of money each month. This way, you'll be prepared for anything that comes your way.