At some point in your life, you’ve probably been told you need a budget.
That’s usually the extent of information we’re given.
We know we need one but we don’t really know what it is, how to make one, and especially not how to stick to it.
Well, consider this your complete guide on how to make a budget.
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What Is a Budget?
Let’s start at the beginning. What exactly does it mean to have a budget?
Most of us view a budget as restrictive and stifling. We recoil at this thing telling us what we can or can’t have. It’s like a diet for our money.
But it doesn’t have to be.
In the simplest of terms, your budget is just a plan for your money.
It’s the route you’ve plotted on your map to financial freedom.
It can be as specific as you want, with turn by turn directions, or it can be a general, head north kind of approach.
As long as it’s leading you to your ultimate destination, it’s up to you how you get there.
The beauty of a budget is that it can be whatever you want. You get to set your goals, determine your priorities, and adjust your route as you go.
Making a budget isn’t about setting restrictions, it’s about prioritizing and making decisions based on those priorities.
Why You Need a Budget
Creating a budget is essential if you want to achieve financial security.
A recent survey revealed that over 50% of Americans wouldn’t be able to cover a $1,000 emergency with savings.
In fact, 33% of respondents were already in debt because of a previous $1,000 or higher emergency.
Debt as a concept is as old as time, but debt as a lifestyle is relatively new.
We’ve become a society not just burdened by debt, but accustomed to it.
Recent college graduates are looking at lifetimes of student loan repayment, yet are still encouraged to buy new cars and houses, go out to eat every night and live life to the fullest regardless of their ability to pay for it.
Having a budget doesn’t mean you can’t do those things, but it does mean you’ll need to learn to prioritize and spend accordingly.
Budgeting is a way for you to determine what you want and make a plan for getting it.
If you’re tired of accepting debt as the norm, you want to retire in comfort instead of poverty, or you just want to be in control of your finances once and for all, you need a budget.
Will a Budget Work?
No single budget or method will work for everyone. But budgeting as a means of tracking and prioritizing your spending will.
Remember, budgeting is just you telling your money what you want it to do.
A budget itself can’t fail unless you fail to keep it.
That doesn’t mean you have to live in rigid accordance with your initial plan.
It means you need to adapt as you define your priorities and recognize your habits and tendencies and how they affect your goals.
Once you figure out what your goals are and start adjusting your behavior to meet them, your budget will be your guide. It will take you down the path to whatever goal you’ve decided to pursue.
A budget is a plan, but it won’t work unless you implement it.
What Tools Do You Need to Make a Budget?
You only really need a pencil and a piece of paper to budget. But after you read through this guide you’ll have a better idea of what kind of budgeting you want to try and what tools may help you along the way.
There are several different apps that people swear by and credit for their budgeting success. (I’m a
But it’s not the method or the software that will lead you to success. It’s the mindset you have toward your money and your goals.
How Do You Make a Budget
There are some basic steps you have to take to create a budget.
At a minimum, you’ll need to know your income and expenses. But if you want to be successful there are some other things you can do to help you create a budget that you’ll stick to.
Step 1 – Know Your Purpose
Before you get started with the numbers it helps to know why you want to try budgeting to begin with.
For us, it was finally feeling fed up with debt and wanting to set a better example for our son.
For some, it’s a desire to retire early and build a lifestyle they can enjoy that’s not wrapped around the idea of working a 9-5 job.
It may be as
Whatever your reason (or reasons), it helps to pinpoint it at the beginning.
Having a foundation for your budget will help it keep from collapsing when things don’t go according to plan. And things never go according to plan.
Step 2 – Track Your Spending
Once you know why you want to budget, take a few days to simply track your current spending.
Taking an honest look at your spending habits will help you set realistic goals and expectations so you don’t set yourself up for failure.
One of my biggest budget hurdles was (and still is) eating out.
By tracking my spending for just a week, I could see it was a problem area.
But I knew simply saying “no more” would lead to failure. Going cold turkey rarely works. So I set goals that gradually reduced my eating out and eventually reduced my desire to eat out.
Dining out and groceries tend to be quick-win areas for most people to gain some momentum but track your spending for yourself to see where you should focus first.
Step 3 – Determine Your Assets & Income
Before you can budget, you need something to budget with.
Take a look through your accounts and add up all your available funds.
Depending on the budget method you’ll choose, you can also make a note of the income or paychecks you expect to receive.
I prefer to only look at the money I can actually spend. That means only counting what I have in the bank available for withdrawal.
If you want to track your retirement or net worth as well, you can, though I’d recommend doing it separately.
Your budget is a reflection of how you want to spend your money, so I wouldn’t include any money you don’t want to spend there.
Step 4 – Take Note of Your Expenses
Figuring out your monthly expenses is a relatively
You probably already know most of your non-negotiable bills (rent, electric, water, etc). Add those to your discretionary expenses to figure out how much you’re actually spending.
Discretionary spending is the expenses you have a bit more control over. They can be variable like groceries or fixed like your internet bill, but you still have the flexibility to change them based on your usage.
For example, you can drop to a lower speed tier for your internet or try meal planning to save money on groceries.
While most bills tend to be monthly, you’ll want to look out over the next year to note all of your irregular expenses.
Things like car and homeowner’s insurance, medical deductibles, annual memberships and the like all need to be noted if you don’t want surprises derailing you in the future.
Step 5 – Make Some Goals
Your top priority with creating a budget should be to make sure your income is greater than your expenses.
But the best way to achieve this is by setting actual goals for your finances.
This is where prioritizing comes in.
If you want to travel the world, but your current expenses leave you little wiggle room, let alone spare cash, you need to reassess your spending as it relates to that goal.
Take a look back through all your expenses and determine which of them takes a back seat to your higher priorities.
You may find some easy ways to reduce or eliminate expenses and start saving, but other decisions might require a bit more thought. That’s why it’s important to know your purpose.
Your purpose and your goals for your money will be the guiding light to keep you on track when you face temptation or frustration.
Step 6 – Pick a Budget Method
There are several types of budgets you can try out.
Some are more specific than others, but people have had success with them all. It’s just a matter of finding which one suits you.
The most popular are the:
Here’s a brief idea of how they each work. Pick one that resonates with you and give it a try. If it doesn’t work out, come back and try another until you find the right fit for you.
With this method, you’ll divide up your income (take-home pay) into separate segments.
- 50% goes toward needs – Housing, transportation, and food expenses primarily.
- 30% goes toward wants – Pretty much everything you enjoy but don’t need to survive like entertainment, clothing, dining out, etc.
- 20% goes toward savings – You can pick what vehicle of savings you want, but this is usually referring to an emergency fund and after-tax investments.
PROS: great for people who don’t want to deal with tracking every penny they spend.
CONS: requires discipline to not over-spend.
This method is relatively self-explanatory. You label envelopes according to your expenses and fill them up with cash to pay for them.
This can be a pretty restrictive method, but it’s great if you have a tendency to overspend.
With the envelope method, once you’ve spent what’s in an envelope, that’s it. You’ll have to wait until you can refill it before you can spend in that category again.
You may be tempted to raid other envelopes, but eventually, you’ll be stuck with multiple empty envelopes and no choice but to wait it out and get creative with whatever resources you have.
PROS: great for people who tend to overspend.
CONS: works best for cash-based and can feel overly restrictive.
For this budget, you’ll track and budget every single dollar so your income and expenses will zero out.
That doesn’t mean you actually spend all your money. It just means that you assign every dollar a purpose or a job.
With zero-based budgeting, even your savings is considered an expense. Those dollars aren’t spent, but their job is set for future spending.
PROS: great for people who want to have total control and visibility into their finances.
CONS: can be confusing and difficult to maintain.
Calendar budgeting is pretty much what it sounds like.
You use a calendar to plot out your paydays, your bills, and to track your spending as you go.
By itself, calendar budgeting is great for awareness but lacks a bit in terms of purposeful spending.
Calendar budgeting can be great for getting a birds’ eye view of your month but works best in conjunction with another method.
PROS: great for seeing what inflows and obligations you have for the month ahead.
CONS: doesn’t really help you make a plan or prioritize.
How to Implement Your Budget Method
Most budgets are set up monthly because that’s how most services are billed, but you can choose to budget along whatever time interval works for you.
Breaking your budget down by paycheck is probably the fastest way to break the paycheck-to-paycheck cycle. It’s also the strategy we used to get out of debt.
My monthly bills calendar will help you see when your bills are due in relation to when you get paid. This can help you break your expenses up per paycheck so you don’t feel overwhelmed before you even get started.
You’ll also want to consider which payment type can help you stick to a budget. If you have a habit of overspending, sticking to cash or debit may help you stay on budget.
Experiment with different budget methods and intervals and find the one that works for you.
Review and Make Adjustments
Regardless of the budget method you choose, you’re going to need to make adjustments along the way.
It’s important to review and evaluate your progress as you go.
You’ll notice spending habits that may need to be adjusted (like my eating out too often) or tendencies to spend leftover cash instead of saving it.
Make sure you’re being honest with yourself and set realistic expectations.
If you find yourself always overspending it may be that you are trying to be too restrictive and can’t actually get by on that amount, or that your priorities aren’t aligning the way you think they should.
Don’t be afraid to rework your budget.
Remember, a budget is just what you plan to do with your money.
If your priorities change, you just adapt your plan accordingly.
Budgeting Tips and Tricks
Now that you know the what, why and how of budgeting, here are some tips and tricks to help you make the most of your new budget.
My favorite budgeting hack is automating your finances. It’s amazing how much you can change your behavior when you’re not even aware of it.
Start with automating your savings since that seems to be the toughest area to focus on.
It’s human nature to focus on today and not think about what we may need down the road. But inevitably we’ll get hit with something unexpected and be derailed completely.
Start by automatically transferring a small percentage (even as small as 1%) of each paycheck to a savings account. If your employer allows you to split deposits, go that route so you never even see the money hit your account.
If not, you can still set up recurring transfers, you just have to be more careful not to spend the money before it can be transferred out.
Then, pick an interval to gradually increase that savings rate.
By gradually increasing it, you won’t feel the sudden shock of losing spending money you once had.
If you only increase your savings by 1% each month, you’ll be saving 12% of your income by the end of the year without even noticing the change!
Give Yourself Some Fun Money
Budgets get a bad rep for being overly restrictive and making you feel like you can’t have any fun.
But since you control your budget, if you’re not having any fun it’s your own fault.
I’m kidding. (Not really.)
I know a lot of us have non-negotiable bills that eat up the bulk of our income. But that doesn’t mean you can’t have any fun.
Consider giving yourself a fun money allocation.
It doesn’t have to be a lot, but enough so you don’t feel resentment toward your budget and end up rebelling against the whole thing.
And just because you give yourself some fun money doesn’t mean you have to spend it.
If you can only afford $5 of fun money a month you can splurge on something little, or save it up for something bigger.
I saved up my fun money for over a year to eventually buy myself a new iPad. It felt great making such a big purchase with cash and not even touching our family budget.
Use Tools You Enjoy
This may only apply to me, but I love playing with apps and software.
I attribute part of our family’s financial success to my enjoyment using YNAB.
Maybe you’re a spreadsheet whiz and get a kick out of designing your own macros (honest note: I don’t really know what that means). Creating a budget in Excel may help you stick with it if you have fun with the program.
But you don’t have to be a software junkie to enjoy the tools you use.
If you like to bullet journal consider adding your budget or other spreads to your journal.
Spending, debt, and bill trackers are some of the more popular spreads I’ve seen.
If you’ve got a goal or some big targets it’s often easier to hit them when you break them down.
It’s also more fun and motivating if you can see your progress.
Try using debt or savings charts to help you make a game of it.
Visual aids also help to get the whole family involved and keep everyone’s eyes on the prize.
I’ve been tackling different money challenges every month to try to increase my awareness, create better habits, and keep myself motivated.
If you find yourself ignoring your budget because it feels stale, consider taking on a money challenge.
There are all kinds of savings challenges. A few of my favorites have been:
These can really help you focus on your priorities and save money fast.
They can be as restrictive or specific as you want.
Having done a pretty restrictive no-spend challenge, I think I’d prefer to do more focused ones in the future.
Knowing my weakness for eating out, I’d do well to challenge myself with a no-spend on restaurants.
Keep the Change Challenge
This is a relatively easy challenge depending on how you set up your rounding rules.
Traditionally you’ll round up every purchase to the nearest dollar. So a $3.50 latte, becomes a $4 expense. $3.50 for the coffee and 50 cents that goes into savings.
Super in concept, but can get tedious to do manually if you have a lot of purchases.
Use an app like Qapital to do the hard work for you.
It has a round-up challenge built-in and even lets you adjust the rounding amount. So if the nearest dollar isn’t saving you enough, you can round it up by more.
Save Your “Savings”
Saving your “savings” is all about setting aside any money you save with your purchases.
So for example, if you use a $1 off coupon at Starbucks, you’ll transfer that dollar into savings.
I really like this challenge because all of that “savings” adds up fast (especially with groceries).
Also, because your outflow is going to be higher than usual, it will help you feel scarcity without actually putting your finances at risk.
For example, if you usually spend $350 per month in groceries and you actually save the “savings” printed on the bottom of your receipt, you may end up spending closer to $450. T
hat means you’d have $100 less to spend than you usually do.
While that may seem like a scary proposition, remember that $100 didn’t just disappear, it’s being saved.
This savings challenge is a great way to help you prioritize and fund your savings goals.
Budgeting isn’t a difficult concept and it doesn’t have to be a difficult process. As with so many things in life, it’s about finding out what works for you.
Following the steps above will give you a good foundation to build a budget that works for you.
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