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How To Create A Budget: A 6-step Guide

November 5 By Natalie Bacon This post contains affiliate links. Read the disclosure policy.

How To Create A BudgetLet’s be honest. Sometimes, it’s hard to stick to a budget.

That’s what I’m here for.

I went from knowing nothing about money at all to using a monthly budget that I update regularly with success (and I’m a spender at heart!).

I’m going to walk you through exactly how to create a budget so you’re successful.

You can learn how to budget by using the steps below.

 

How To Create A Budget

Before you start budgeting, download my budget spreadsheets. I created these budgets because nothing else was working. These budgets are different. They’re completely customizable to fit your needs. They’re what I use to this day.

Once you have your budget ready, you can move to step 1!

 

Step 1: Calculate your monthly income

To create a budget, first, you should calculate your income.

List all of your income in your budgeting tool (whether that’s at the top of a page or in an excel spreadsheet. This step is really important. Don’t leave anything out (like rental income or extra income from a side job). Include all sources of income.

Your income is what you’ll subtract your expenses from.

For a lot of people, this is simply the money they take home from their salary. But if you are a business owner or if you have additional income from a side hustle, you will want to include all of your income on your budget. Try your best to estimate what your monthly income will be for this month. If your income is inconsistent, take the average of the last three months income and use that as your income.

Here’s an example.

At the top of the budget spreadsheet list your income, line by line:

1. Income

  • Take home pay from job: $4,000
  • Babysitting income: $500
  • Blog income: $400

That’s it for step 1!

On to Step 2…

 

Step 2: Add up your fixed monthly expenses

Next, you need to list out all your monthly expenses.

To do this, start by listing your fixed expenses (also known as non-discretionary expenses). Your non-discretionary expenses are expenses that you must pay. Include debts in your non-discretionary expenses, too. Examples include your rent/mortgage, gas, water bill, groceries, car payment, and student loans (think monthly bills and living expenses that are absolutely due during the month).

  • Related: How to radically reduce your expenses

If you’re not sure what your expenses are since you haven’t budgeted before, go into your accounts online from the past 1-3 months and use the average number for each expense category. Depending on how messy your finances are, this task may seem daunting. But it’s really important to use as close to exact numbers as you can because it’ll make your budget as accurate as possible.

Going on with the example from above, your expenses should be listed out, line by line, like this:

2. Expenses

  • Rent: $1,000
  • Electric Bill: $25
  • Gas Bill: $20
  • Groceries: $350
  • Student loan payment: $MyFirstBornChild 😉
  • {Fill in the blanks will all your mandatory expenses}

It’s better to be more inclusive when you’re getting started. Break out every line item as an expense in your budget. You can always combine later. This will help you stay on track more easily.

Once you have your fixed expenses listed out, I want you to stop and move on to step 3.

 

Step 3: Set financial goals

Before you add anything extra to your budget (like entertainment), I want you to pause and take an extra step of setting financial goals.

The reason this is important is that it will give you a plan and help you prioritize what’s important to you, instead of just going about your normal day-to-day spending.

So, write out your financial goals (learn how to set goals here). If you haven’t written out goals before, a good place to start is by looking at the vision you have for your financial life. Do you want to be financially successful? Do you want to have wealth? Do you want to be debt free? Think about what you want in the ideal situation and think about where you are right now. Then, determine your personal financial goals that you want to set for the short-term (i.e. under a year) that you’ll include in your monthly budget.

Examples of financial goals:
– Get out of debt
– Build a 3-6 month emergency fund
– Fully fund a retirement account
– Save for a down payment on a house

Think about what you want for your financial life. Write down your financial goals.

After you’ve written out your financial goals, begin to think about them as “expenses” and enter them into your budget. By thinking of your financial goals as expenses, you’ll pay them monthly. This will get you in the habit of saving for your financial goals, which is necessary for success.

Adding to the example above, it would look like this…

2. Expenses

  • Rent: $1,000
  • Electric Bill: $25
  • Gas Bill: $20
  • Groceries: $350
  • Student loan payment: $MyFirstBornChild 😉
  • {Fill in the blanks will all your mandatory expenses}
  • Emergency fund savings: $300
  • Car Savings: $200
  • Debt repayment: $400

Note that these are treated as “expenses” even though you wouldn’t normally think of your savings as an expense. For your budget, I want you to do just that.

A good thing to remember is that a budget is strictly made up of income and expenses — it’s only looking at your cash flow. So, if you’re not sure where to put something, it’s probably an expense if it’s money going out of your pocket.

 

Step 4: Determine your discretionary expenses

Now, you can add in the extra stuff for your discretionary expenses.

It’s third on the priority list (after mandatory expenses and financial goals).

Your discretionary expenses are expenses that you currently pay for, but that are not essential. Examples of discretionary expenses include entertainment, dining out, gifts, vacations, personal care, and clothes. These are costs that can be adjusted based on what you can afford. Notice that they come after your fixed expenses and financial goals. It’s important to prioritize your financial health over unnecessary things, such as entertainment and vacations.

  • Related: 10 tips to get your adult financial life in order

Building off the example above, your expenses would now look like this…

2. Expenses

  • Rent: $1,000
  • Electric: $25
  • Gas: $20
  • Groceries: $350
  • {Fill in the blanks will all your mandatory expenses}
  • Student loan payment: $MyFirstBornChild 😉
  • Emergency fund savings: $300
  • Car Savings: $200
  • Debt repayment: $400
  • Dining out: $75
  • Hair and Beauty: $50
  • Other: $150

Now, you’re done with collecting data. You can move on to the fun part…

 

Step 5: Subtract your income from expenses

Now, subtract your expenses from your income.

If you get a positive number, this means you make more money than you spend (woohoo). Now, you can go back to your budget and adjust your numbers if you need to. For example, maybe you have a surplus of several hundred dollars. You could put more into savings or put more toward your debt pay off. You want to give every dollar a mission in your budget, so you’re completely planning out what each and every dollar is for.

If you break even, this means you have exactly enough money, but no margin. You may want to adjust your budget to give yourself some margin in the form of a “discretionary” category in the event that things come up that you didn’t plan for.

If you get a negative number, this means you’re spending more money than you take home (not good). If your number is negative, adjust your budget by decreasing some of your discretionary expenses or find a way to increase your income. A way to decrease your discretionary expenses is to spend less on entertainment, dining out, or other non-essential things. Make sure your financial goals are being met before spending on discretionary items. For example, it’s an unwise financial choice to go on a vacation if you don’t have an emergency fund.

Whatever your number, there is power in knowing. It’s the first step toward planning your financial future.

You’ve now basically done the hard stuff. All you have left is monitoring and adjusting things.

 

Step 6: Implement, monitor, and adjust your budget

Finally, you need to implement, monitor, and adjust your budget according to how your life plays out.

I recommend scheduling a “budgeting meeting” with your family to talk about your budget regularly. I do a financial meeting weekly, which works because it’s often enough that I check in and re-tabulate how it’s going, but not too often that it becomes a daily task. I set aside an hour Saturday morning to look at my accounts and make any changes to my budget. This is a great time to go over your budget if you’re doing it with a significant other, as well. The important point is to check in regularly. This will help you implement your plan and stay on track.

As you monitor your budget, reflect on the process, and make changes as needed, keep going and let your budget be the system that helps you achieve financial success.

 

A Final Note!

The first couple of months of budgeting can be rough. Just know that nothing has gone wrong. This is totally okay!

If you stick with it, you’ll be successful (and it will be worth it).

I also recommend taking a budgeting course, like Budgeting For Budget Haters for extra motivation and accountability in your budgeting.

For more on learning how to budget, visit my Ultimate Budgeting Guide.

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Filed Under: Budgeting, Money Tagged With: budgeting, money, money lessons, organize, save money

About Natalie Bacon

Natalie is a Certified Life Coach and recovering attorney and financial planner. She helps creative, career-driven women who want more from life. More fulfillment, more money, and more freedom. If you want to accomplish your goals, master your mindset, build an online business, or make more money, you're in the right place. Read Natalie's story here.

Comments

  1. Emily @ Simple Cheap Mom says

    November 5 at 8:23 am

    Great article covering the basics.

    My one tip would be to actually track your spending for the first month. Your guess how much you usually spend on things will probably be off!
    Emily @ Simple Cheap Mom recently posted…A Simple Life Without The ChickensMy Profile

  2. [email protected] and the Beach says

    November 5 at 8:39 am

    It’s something I really wish I would have done earlier in life to see where my money is going. Even though at that time I was making an OK living, I still could be so much father ahead than I am now for things like retirement and other savings goals. Oh and yes I now for sure budget. 🙂
    [email protected] and the Beach recently posted…Budget Circus SideshowMy Profile

    • Natalie Bacon says

      November 5 at 9:27 am

      I hear you, Tonya! I wish I started in my teens! I’m hoping in twenty years I’ll be happy to know I got out of my debt fast and saved for retirement early. Better late than never!

  3. Lance @ Healthy Wealthy Income says

    November 5 at 11:23 am

    Just be honest with yourself about your spending and true income. Don’t fudge the numbers it only sets you behind. Once you know where your income and spending is at and adjust to get spending below income you are on your way.
    Lance @ Healthy Wealthy Income recently posted…Habits That Get You Rich and Financially IndependentMy Profile

    • Natalie Bacon says

      November 5 at 1:39 pm

      That tip is more helpful than one might think. I’m a big believer in avoiding your financial temptations, and only you know what that is. For me, it’s clothes. I have to be very honest with my spending and careful with my budget, paying closer attention to clothes shopping than the average person.

  4. DC @ Young Adult Money says

    November 5 at 1:36 pm

    I don’t “truly” budget, but I do track our expenses each month. This post actually gave me an idea for how I can easily add a budget portion into our spreadsheet. I could just take all the categories and put a “projected” or “budgeted” amount at the beginning of each month and then tag that with a “budget” and all the actuals with an “actual” tag. Then I can pivot off of it and automatically calculate the difference. Hmmmm this just might work out well for us. Thanks for the post and getting me thinking about budgeting!
    DC @ Young Adult Money recently posted…A Case for Earning More Over Spending LessMy Profile

    • Natalie Bacon says

      November 5 at 1:41 pm

      That’s what I do, if I’m reading what you’re saying correctly! If you take a look at my template, there’s a projected and actual column in each table that’s formulated to tabulate the difference. I find it really helpful for both budgeting / planning and tracking.

  5. Sarah says

    November 5 at 4:19 pm

    We didn’t use to budget (well, we did, but it wasn’t very detailed). Our philosophy was always save, pay bills and spend the rest. While that can work since we’re not going into debt and we’re saving, we didn’t realize just how wasteful we were until we added up our “miscellaneous” expenses. I’m going to do a post on this soon – but we spend a whopping $2,086 in October on who knows what?!?! That’s what happens when you don’t have a budget!!! This month, it’s all about cracking down on our expenses and getting on track with a budget!

    Thanks for the inspiration!!
    Sarah recently posted…November goalsMy Profile

    • Natalie Bacon says

      November 5 at 7:04 pm

      Yea, now that I budget I realize my misc. spending is actually pretty high (around $400). But I will say that with the budget, I actually know exactly what the “misc” stuff is, which I find to be much more helpful. Good luck!

  6. Liz says

    November 5 at 9:31 pm

    I’m a budget believer for sure. Even if you are a saver, I think it’s still helpful to spend some time analyzing your income expenses. I think it also helps you watch out for errors/mistakes. For example, one time my local newspaper double-charged me for my subscription to the paper (the subscription auto-renews every six months). I knew the number looked odd because I had been tracking the expense. If I wasn’t budgeting, it would have been very easy to miss the overcharge.
    Liz recently posted…The Extra Money ChallengeMy Profile

    • Natalie Bacon says

      November 6 at 7:57 am

      That’s a perfect example of the value of budgeting – even for those who are naturally good savers. Love that, Liz!

  7. Jenna says

    November 5 at 11:10 pm

    I’ve switched over to an actual budget in the last two months, after just monitoring expenses for two years. If you’re just starting out and setting up a budget seems like a total pain, monitoring expenses can still open your eyes to what’s going on with your money.
    Jenna recently posted…How Money Gave Me Confidence to Pursue FreelancingMy Profile

    • Natalie Bacon says

      November 6 at 7:58 am

      Yea, that sounds like a good way to start paying attention to what’s going on and becoming more involved in your finances.

  8. Shannon @ Financially Blonde says

    November 6 at 10:29 am

    I am a big fan of the goals based budget where you set a goal, typically a savings number and work everything else around it. I use it quite a bit with my client’s and they don’t even realize it. It’s a sneaky way for me to get them to budget without them knowing it. As long as they are making their goals, their budgets stay in check, plus they feel empowered when they make goals.
    Shannon @ Financially Blonde recently posted…Music Mondays – Somebody to LoveMy Profile

    • Natalie Bacon says

      November 6 at 11:16 am

      Yes, I definitely feel empowered once I’ve started reaching my goals. It’s very encouraging every time I pay off the next $1,000 on my student loans!

  9. Myles Money says

    November 6 at 5:47 pm

    I think everyone needs a budget because this stuff is just not instinctive. Even for the savvy ones, you spend less than you earn but how do you know where you’re headed if you don’t have a plan? And what about when life throws you a curve-ball? I’m not talking about just planning for retirement and having an emergency-fund… what about when you get sick or lose your job or if the property market tanks? Of course, you can’t budget for every event, but it sure helps to have a plan.
    Myles Money recently posted…Monetizing Your BlogMy Profile

    • Natalie Bacon says

      November 6 at 7:13 pm

      I’m with you, Myles. I find huge value in budgeting, and I can’t imagine my life without it. I will say I know a select few who manage to do a great job and know what’s going on with their finances without a written budget. IF not for them, I would say yes, for sure everyone should budget.

  10. Brian says

    February 2 at 9:45 am

    Great article and budget template. I have forwarded the link to both of my daughters… one is a recent college graduate with her first “real” job, and the other is a junior in college.

    Thanks!

Hi there! I'm Natalie. I'm a Certified Life Coach and recovering attorney and financial planner. I have the honor and privilege of helping creative, career-driven women who want more from life. More fulfillment, more money, and more freedom. If you want to accomplish your goals, master your mindset, build an online business, or make more money, you're in the right place. Read my full story here...

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