How 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 how much you spend.

Let’s explore how to create and maintain a monthly budget so you can start to see your big financial picture and develop healthy money habits.

How do budgets work?

Simply put, a budget is a financial plan that tracks the money that comes in and goes out of your household. Creating a budget allows you to view your expenses, note your spending habits, and set savings goals. Feeling overwhelmed by the thought of creating your own budget? Use our Budget Tracker! It's a handy tool for identifying areas where you can reduce costs and save money.

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

3 popular budgeting methods

Here are some common budgets to help you get started:

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, 30% for wants, and 20% for savings and debt repayment. This budgeting method helps you ensure that you're spending within your means and not overspending on non-essential items.

Pay-yourself-first budget

Pay-yourself-first is a popular budgeting method that treats your savings as an expense.

When you pay yourself first, you prioritize your savings goals and debt repayment by setting aside money each month before you spend a dime on anything else. This type of budget can help you reach your financial goals more quickly, but it requires discipline to stick to it.

Zero-based budget

Zero-based budgeting is a more complex strategy where you assign every dollar you earn a “job.” Basically, you create categories for expenses and savings, then ensure each dollar goes into one of those categories. If done correctly, once you’ve divided your income into categories, you should be left with zero.

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.

Steps to creating a budget

Whether you’re revisiting the idea of budgeting or creating a budget for the first time, here are some easy steps you can take to create a plan that works for you:

1. Visualize your long-term financial goals

Thinking about your long-term financial goals can help you figure out the right budget plan and stay on track. So, sit down and ask yourself what financial goals you want to achieve in the upcoming year. What about the next 5 years? The next 10 years?

Would you like to save for a mortgage down payment? Do you want to go back to school? Maybe you’d like to finally take that dream vacation. If it helps, create a collage of your long-term goals, and keep it in a place where you can see it every day.

When it comes to budgeting, it’s best to have a long-term plan so your motivation doesn’t lose any steam.

2. Calculate your income

Before you can create budgeting categories, you need to know how much 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.

You should also include 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 to, the amount, and the date. You might also include whether the expenditure was necessary or an impulse buy.

Be sure to note your regular monthly bills, such as utilities, insurance, groceries, gas, etc. If you have any semi-annual or annual bills, such as an HOA bill 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

Use our Budget Tracker tool to record your income and expenses for at least one month. 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 your budget plan

Now that you’ve analyzed your earnings, spending, and saving habits, create a monthly budget and stick to it.

Your budget should obviously include those regular, must-pay expenses, but you might also want to create a miscellaneous category for impulse buys and unexpected expenses.

6. Have a family meeting

Share the new budget with household family members, especially if it will affect their own spending habits. Give specific examples for how things might need to change, such as dining out less.

You might encounter resistance at first, but once you get everyone on board, it’ll be easier to stick to your budget.

7. Start saving

If you haven’t already, set up a savings plan and incorporate it into your new budget.

For example, you might ask yourself how much you want to save this year. Take that number and divide it by 12 to get the amount you’ll need to set aside each month.

Part of your savings strategy should include investing and retirement planning. Be sure to include your 401(k) or other retirement plan in your budget so you can see how much you’re contributing each paycheck.

Tips for sticking to your budget

No matter which budgeting strategy you prefer, these tips can help you stick to it:

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.

What if I need more money than I’m bringing in?

If you’re running low on funds before your next paycheck and need some extra cash, you may be worried about covering the expenses listed in your budget. Fortunately, Advance America offers quick and easy loans that can get you the money you need as soon as the same day you’re approved.

Here are some of the loans we offer:

• Payday Loans: These small-dollar, short-term loans can help you cover expenses between paydays. With a Payday Loan, you typically borrow a few hundred dollars or less and repay the loan in full when you get your next paycheck, usually in two to four weeks.

• Installment Loans: This type of short-term loan gives you a lump sum of money. You then pay back the Installment Loan in fixed monthly payments, or installments, over a few months or years.

• Lines of Credit: A personal Line of Credit is a flexible loan that gives you access to as much or as little funds on demand, up to your set credit limit. You can pay back the amounts borrowed all at once or over time, and you only pay interest on the amount you borrow.

Let Advance America help cover unexpected expenses

When your budget’s tight and you can’t afford to cover necessary expenses, Advance America is here to help. We offer a range of personal loans that let you access extra money fast.

Visit your nearest Advance America store today to learn more about our money solutions. Ready to apply? Start your online application now!