The step by step guide on how to make a budget

Nobody likes the word budget, but a budget is necessary in order to effectively manage your money, give it purpose, and ultimately reach your money goals. If the income you generate just sits in a savings account or you spend it irresponsibly, it’s not doing you anything and definitely not helping you reach your money goals. 

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So, as much as you may not like budgets, let’s break it down into easy steps so you can create your own and start the journey to money goals and financial freedom. 

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What is a budget? 

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We talked about budget, what it is, and how it can help your financial wellbeing in another article, but let’s do a quick recap to get reacquainted. 

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Essentially, a budget is a plan for your money - this doesn’t mean it has to be extremely strict or conservative, but there should be some type of structure to your budget in order for it to be effective. 

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Think of a budget like planning a vacation, you want to make sure everything is in order, you’re prepared for the worst, and have a backup plan in case you need it. However, instead of planning a beach vacation, you’re planning your future money goals and building healthy habits. 

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How do you make a budget? 

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Budgeting may seem intimidating, and if you want a brief overview of how to create a budget before we dive into the step by step guide, you can get started with our overview article on How To Make a Budget. If you’re ready to jump right into the step-by-step guide then more power to ya! 

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I want to stress that no matter where you are when it comes to financial health, knowledge, and goals - it’s possible to make and be consistent with a budget, especially when you stick to these five steps. Also, because income and expenses are changing regularly it’s important to do your budget every month and make sure you’re still on track for your budget and you can make revisions if necessary. 

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To put it simply, your budget consists of two factors - your income and your expenses. In order to make a budget you need to: 

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1. List your income
2. List your expenses
3. Subtract your expenses from your income
4. Make every dollar of your leftover money work for you
5. Repeat before the end of every month 

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So, let’s break down each of the five steps, and if you’re doing this in the middle of the month, plan out your budget for the next month to make sure you’re able to stay on track and get everything together before the start of the new month. 

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Step 1: List out your Income 

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In order to figure out how much you can dish out to savings, investments, and put aside for your spending, you need to know how much income you have coming in every month. That’s why we start with income, because it sets the stage for everything else, and allows us to make an accurate budget. 

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If you only have one source of income, you’re going to list it as Income  but make sure to list it out for the whole month - so let’s say you get paid bi-weekly, it would look like this. 

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Income 1: $1500

Income 2: $1500 

Total Income: $3000

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If you have a partner that you’re making a budget with you’ll list their income out as well. Let’s say they get paid bi-weekly too, so it would look like this. 

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Income 1: $1500

Income 2: $1500 

Income 3: $2000

Income 4: $2000 

Total Income: $7000 

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You can also put Name 1, Name 2, Name 3, if that’s easier and works for you. If you get paid weekly, you’ll do the same thing but you’d have four paychecks listed for the month instead of just two.  If you have an extra set of income, like a side hustle, you’ll want to include this in your list as well. 

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It can get a bit tricky if you have a job that works on commission, or something that wouldn’t provide a consistent income every month. In order to list this out, take a look at what you made over the past two-three months and build your income off the lowest amount between those months. Using the lowest gives you the “worst-case” scenario and allows for better planning. 

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Step 2: List out your expenses

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This step is one you’ll want to make sure you’re thorough about, as your expenses take away from your income and if you have a lot of expenses and not much income, it will give you an idea of whether you need to increase income or decrease expenses. 

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It’s a great idea to either have a physical bank statement printed out and in front of you, or have your bank account open in another tab if you’re doing your budget electronically - this allows you to see all your expenses easily so you don’t have to rely on your memory. There’s almost two parts to this step - first we want to list out all the expenses you have, then we’re going to use that information to budget for those expenses and round up the actual cost to give the budget a cushion. It could look like this: 

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Round up to even numbers:

Water: $48     →    Water: $50

Mortgage / rent: $1500    →     Mortgage / rent: $1500

Electricity: $142   →    Electricity: $150

Internet: $85    →    Internet: $90

Phone bill: $263   →    Phone bill: $300

Heat / natural gas: $34    →     Heat / natural gas: $40

Groceries: $289     →     Groceries: $300

Gas: $177    →    Gas: $200

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Now that you’ve got your actual and cushioned expenses listed out, you can get a better idea of how much income you’ll have left over every month. Your list might look different, depending on what expenses you have a month - you may have other recurring subscriptions like Netflix or meal subscription boxes that replace groceries, this is the part where you’ll want to look at your statements or account to figure out what exactly your expenses are.

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Other things to include in this expenses section may be: 

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Childcare

Insurance

Clothes

Entertainment

Amazon (Jeff Bezos gets everyone it’s important to include this if you want to specifically budget for Amazon) 

Make sure to be thorough with this section, it will make the next step more realistic and paint an accurate picture of how to create your budget. 

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Step 3: Subtract your expenses from your income 

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Now comes the part where your budget picture comes to life - now that you’ve got a list of all your expenses and a list of your actual and cushioned expenses, add them both up, and subtract your expenses from your income. Once you do that you may have two things happen: 

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1. You may be left with a negative balance, or little to no money left over after doing the equation
2. You may have a surplus of money left over 

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If option one happens to you there’s a few things you need to account for when creating your budget in the next step. Having a negative amount left over or barely any left over means either your expenses are too high or there are too many of them - OR - your income isn’t enough to cover your expenses. Let’s break the first situation down a bit more. 

What happens if you have a negative balance or little to no money left over?

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If this happens after you do your equation, you need to evaluate your expenses and your income. If you ignore your necessities (rent, utilities, transportation), because you can’t change and adjust these like your other expenses like Amazon, entertainment, subscriptions like Netflix and Youtube TV, etc. Take a look at how you can lower these expenses to free up some of your income for savings and investments. 

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Play around with the numbers and see, once you reduce your expenses, how much of your income is left over - if you have a surplus left over then you’re good to move on to the budgeting step. If reducing your expenses still doesn’t free up a surplus of money, you’re going to want to take a look at how to increase your income, whether that’s getting a new job, getting a raise, or starting a side hustle. 

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Once you’ve nailed this step and come up with the amount of money you have left over, it’s time to move on to step 4. 

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Step 4: Make every dollar of your leftover money work for you 

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Now that you know what’s left, assign every dollar of the left over money a task - whether it’s retirement, savings, fun spending, etc. It could look something like this if you had let’s say $1000 left over: 

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Retirement: $200 

Savings: $200

Emergency fund: $300 

Personal spending: $150 

Entertainment: $50

Dining out: $100

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This is a structured and strategic plan for your left over funds - and notice how retirement, savings, and emergency fund are all budgeted specifically, this is important because you don’t want to forget about these aspects of your money management. 

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Step 5: Repeat this process before every new month 

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You’ve created your budget - now what? Consistency. Is. Key. You want to do this for every new month, things change and you want to get ahead of income and or expense changes in order to revise your budget. 

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It’s also incredibly important that you track your spending and transactions throughout the month once your budget is created, this will help you actually stay on track, not go over your spending limit, and stay consistent with following your budget. 

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Let’s Reap

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You’ve done a lot of work on your budget, and now you’re able to create a budget every month and consistently stick to it. Remember though, it’s important to be thorough in your expenses and track your spending - these are the two things that can trip people up when creating a budget. 

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Your budget doesn’t have to be overly strict or conservative, but it’s important to make every single aspect of your money work for you - which is the actual purpose of creating a budget. If you have debt, make sure to factor that into your expenses because you can’t forget about getting your debt to zero. 

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Overall, take your time with your budget and ensure you’re sticking to it consistently in order to make your money work for you every step of the way and become an expert at managing your money.

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