Budgeting can be easy with these simple step-by-step instructions. If you are just starting (or re-starting) a budget, this is the perfect resource for you!
Creating a budget is one of the best things you can do to improve your financial situation.
Starting a budget will help you organize your finances, provide you valuable insight into your income and expenses, and help you reach your goals (like taking a vacation to Europe, paying off debt, or retiring early).
Whether you have a lot of money, no money, or negative money (ugh, debt), you need a budget.
Does the word budget scare you? Is it overwhelming?
It shouldn’t be!
This simple step-by-step guide to budgeting (it’s truly Budgeting 101) will walk you through how to create your first budget. I will help you create a budget that actually works.
Simple Step-by-Step Guide to Creating a Budget
Step 1: Decide on a Digital or Paper Budget
The very first thing you’ll need to do is decide whether you prefer a digital budget or a paper budget.
You need to determine where your budget is going to live, and that’s simply a personal preference. There is no wrong answer.
To help you decide, here’s a quick run-down of each option:
Paper Budget: This is my personal preference, especially for those creating their first budget or for those in debt.
- A paper budget is very tangible. It allows you to hold your budget in your hands. Something printed out always seems important to me.
- You can add it to your household binder.
- It’s harder to adjust than a digital budget (this is a GOOD thing; you don’t want to be adjusting your budget every day as you find a new skirt or gadget that you want to buy)
- You can keep your budget handy and place it somewhere in your house to remind you to stick to it.
- A paper budget is perfect for the person that loves to use paper planners and prefers getting bills in the mail (instead of electronically).
Sign up here for a simple monthly budget printable (plus you’ll get two more handy worksheets!):
Digital Budget: A digital budget is easy…maybe too easy. This method will work for the person who already feels comfortable with their finances and bills.
- A digital budget is easy to update (but like I said above, maybe too easy).
- The computer program does the calculations for you (no need for a calculator).
- You can create lots of graphs that show your money patterns.
- You have many options for creating a digital budget. You can create an excel spreadsheet (or use an existing budget template). You can also use many of the budgeting programs out there (my favorite is Mint.com).
Check out this post for a list of my favorite (free!) budgeting spreadsheets (note that Mint.com is also free): 8 Free Budget Spreadsheets That Will Upgrade your Finances Today
Step 2: Decide on a Weekly, Bi-Weekly, Monthly, or Yearly Budget
The most common type of budget is a monthly budget. This is what I recommend, especially for budgeting newbies. The reason monthly budgeting is so common is because most expenses are monthly, and many people get monthly paychecks.
However, you can choose to budget weekly, bi-weekly, or even yearly. Again, this is personal preference, but your default (=first budget) should definitely be a monthly budget. This step-by-step budgeting guide will focus on monthly budgeting.
Remember, you can always check up on your budget weekly or bi-weekly (or even daily).
Step 3: Calculate Your Monthly Income
Create a list of all your monthly income. This list should include all of the money that goes into your bank account each month. At the very least, it will include the paycheck(s) you get from your job. This list may also include income you get from side hustles, child support, rental income, etc.
If you are creating a budget with your spouse, include their income too.
After you have a list of your monthly income (the name/type of income and the associated amount), then add it all up. This is the total amount of income you get each month.
Step 4: Determine Your Fixed Expenses
Create a list of your fixed expenses each month. These are the bills that are the same amount each month.
It is easy to determine the amount of money you spend on each fixed expense each month (it’s always the same!); that is why this is the first type of expense we write down. Let’s start with the easy stuff!
Typical fixed expenses include:
- Rent or mortgage
- Loans (for your car, student debt, medical debt, etc.)
- Insurance (car, house, rental, medical)
Step 5: Determine Your Variable Expenses
Create a list of your variable expenses each month. Variable expenses change from month-to-month. The amount of the expense is rarely the same. For example, your grocery bill is different in May than it is in October.
It is a little bit more difficult to determine how much money you should allocate for your variable expenses. I will tell you right now that you won’t get it right on the first try. That’s okay! Any number is better than no number 🙂
To determine the amount you should write for your variable expenses in your first budget, I highly recommend looking at your last three months of expenses and taking the average amount spent.
For example, if you are creating your first budget in April, look at the amount you spent in January, February, and March. For the groceries budget category, add up the three months ($659 in January, $855 in February, and $706 in March) and then divide by three. This calculation results in $740 which is what you should write for your grocery budget in April. Only do this for your first budget. When you create future monthly budgets, you will refine these numbers.
Typical variable expenses include:
- Personal care
Step 6: Determine Your Infrequent Expenses & Create Monthly Funds for Them
Create a list of your infrequent expenses. Infrequent expenses are ones that don’t occur every month. They could occur every six months, every year, or at unknown times (like car maintenance).
Infrequent expenses could be fixed or variable. (You may have included them earlier in Step 4 or 5 – that’s okay. I just want to make sure these expenses aren’t forgotten so I made it an extra step).
Even though you don’t pay these infrequent expenses each month, you should be saving up each month for it.
Listing your infrequent expenses in your budget helps you build up savings (or a monthly fund) for the infrequent expense and eliminates the surprise of a hefty bill. Nobody likes to the shock of a $600 car insurance bill every 6 months. It’s easier to save $100 each month and have the money ready to go once the bill arrives.
Typical infrequent expenses are:
- Some insurance (for example, I have set up my car insurance to be paid every 6 months)
- Car maintenance
- House maintenance
- Medical appointments
- Home Owners Association (HOA) fees
- Computer software license
- Society membership fees
Step 7: Add Up All of Your Expenses
Add up your fixed expenses (Step 4), your variable expenses (Step 5), and your infrequent expenses (Step 6). This is your total monthly expenses.
Step 8: Calculate Your ‘Income Minus Expenses’ and Tweak Your Budget Accordingly
Take your income (Step 3) and subtract your total expenses (Step 7). Depending on your number, you are going to have to tweak your budget. Once your income equals your expenses, you can move on to the next step!
If your get a negative number (expenses > income):
What it means: You are spending more money than you are making each month. This isn’t good or sustainable. You will go into debt (or more debt) if this continues.
What to do: You need to reduce your expenses. There are so many ways to do this. Here are some of the very first things to try:
- Reduce or eliminate all the budget categories that aren’t required for survival (sometimes called discretionary spending). Lower your budgeted amount for entertainment, restaurants, clothing, personal care, gifts, etc.
- Identify areas to save money. For example, challenge yourself to lower your grocery bill with these tricks. Call your cable/internet provider to see if they can give you a discount.
If you get a positive number (income > expenses), then:
What it means: You make more money than you spend each month. That’s great!
What to do: You need to decide what you are going to do with that “extra” money. Here are some suggestions:
- If you have debt, make extra payments towards your debt. This is my #1 suggestion! Check out the Debt Snowball Method for tips on how to pay off your debt fast by making extra payments towards your debt.
- Increase your retirement contributions. Your future self with thank you. Read more about saving for retirement here.
- Create savings goals and funds. Do you want to travel to Europe next year? Do you want to save for your kids’ college education? What about saving a down payment for a new house? Create these savings categories in your budget and starting saving each month.
If you get zero (income = expenses), then:
What it means: Yay! Your budget is good to go!
What to do: Move on to the next step
Step 9: Determine Your Actual Income and Actual Expenses at the End of Each Month
Step 1 – 8 have helped you create a budget. But a budget is completely worthless unless you know how much you actually spent and can compare it to what you budgeted.
In this step, calculate your actual expenses for the month. Do this for every budget category. For example, for your actual grocery expenses, add up the amount you spent for all of the grocery trips you took that month.
Step 10: Compare your Estimated Budget to Your Actual Budget
At the beginning of the month, you have created a budget with your predicted income and expenses (Steps 1 – 8). At the end of the month, you filled in the actual amount you made and spent (Step 9). Now, compare these numbers! Compare the estimated vs the actual for each budget category.
You may have budgeted one amount, but the actual amount you spent was different.
Knowing your actual expenses (not the budgeting amount) and reviewing your budget is so important. What’s the point of creating a budget, unless you implement and review it? It would be like writing a book, but never publishing it.
If you are under in any budget category (you spent less than you budgeted), that’s great. You can move that money to a savings account. Or, if you are in debt, make an extra payment on your debt!
If you are over budget in a category (you spent more than you thought you would), that’s not good. You need to find the money somewhere in your budget or savings to cover the cost.
Step 11: Stay Consistent, Assess, and Adjust Your Budget
You need to create a budget each month. The first budget is the hardest (although, let’s get real, it’s not that hard). The following budgets get easier and easier. Soon, budgeting will be second nature.
Stay consistent and don’t take a month (or two, or three) off.
Each month, assess your budget. Are you spending too much money in a certain category? If so, adjust the budgeted amount, or challenge yourself to save money in that category. Do you think your rent is too expensive? Try looking for a cheaper place to live.
Your budget is never going to be perfect. It’s will always need to be adjusted as you go through life. If you get a raise, have a child, or change your savings goals, you will need to adjust your budget.
Stick to budgeting. Assess your budget throughout the month and at the end of the month. Adjust your budget as your life changes.
A budget will transform your financial life
It’s very hard to accomplish any financial goals without a budget. Budgeting is one of the keys to paying off debt. It’s also the key to reaching your savings goals.
A budget makes you knowledgeable about your financial situation. And knowledge is certainly powerful.
Don’t forget to download these free budget printables that will help you set up your first budget.
How do you budget? What has your budget helped you achieve?