How To Make A Budget In 10 Easy Steps

by Emiley Thacker on 2009-02-0330

How a money management newbie learned how to make a budget by following a few easy steps.

As someone who has been living paycheck to paycheck for years, I’ve recently embarked on a project to begin saving toward twin goals: an emergency fund and my retirement. I would like to get something saved up for the short term in a good high interest savings account so that I can eventually open an account at an investment brokerage for my longer term investments.

The first step in doing this was to figure out where my money was going (turns out it was going to my shoe collection and to my booty via the neighborhood restaurants). The next step was to build a budget to help me stop the mass exodus of dollars from my wallet. I had tried budgeting in the past without success. This time I started with a little research and found that I hadn’t put enough forethought into the process in the past. Here’s a summary of what I learned:

how to make a budget, steps to create a budget

How To Make A Budget In 10 Simple Steps

  1. Track your expenditures for a period of one week to one month. Record every cent that you spend. It’s important to know where your money goes before you set about building a realistic budget. You also need to make a list of expenses that, while not regular monthly bills, occur periodically and must be accounted for (i.e. vehicle registration, property taxes, medical co-pays, etc.). These irregular expenses may be tougher to determine, but try to determine a realistic estimate. This could mean organizing your financial statements, checking your income sources, as well as your outflow. Some people may decide to use budgeting software or decide to do things more manually. Either way is good: just find out which method is most comfortable for you to try.
  2. See how your current expenses stack up against your current income. You need to see where your money stands before you can do anything. Check your fixed vs variable expenses as well as your income each month. Tally your monthly income vs your monthly outflow. Try to prioritize the items.
  3. Make decisions about your budget. Once you’ve gathered the information, it’s decision time! Could you do without the data plan on your cell phone in favor of the basic voice service in order to save $40 each month or $480 per year? Must you have both Netflix and HBO? Does your dog need a monthly trip to the groomer, or could you bathe him at home? These are the types of questions you will need to ask yourself. While you’re doing this, consider the structure of your budget. How are you paying your bills? Most pre-designed systems are designed on a monthly budget cycle. For many people, this works. Personally, I’ve built my budget on a bi-weekly cycle, as this is how I’m paid. For instance, my husband and I alternate paying our $750 rent each month. So every two weeks, I budget $187.50 toward rent. At the end of two months, I’ve got my full rent payment already set aside.
  4. Build your budget. Once you’ve decided what you will spend your money on and how your budget will be structured, it’s time to create your plan. Whether on paper, in a spreadsheet, using personal budget software such as YNAB (You Need A Budget) or (it’s FREE!), the method that is most comfortable for you is the right method. Be sure to include:

    • Net income
    • Savings and investments — This is the first subtraction from your net income because, cliched as it may be, you really do need to pay yourself first.
    • Non-discretionary expenses — Necessities such as mortgage/rent, food, utilities, debt repayment, and the like. Don’t forget about those irregular expenses, too.
    • Discretionary items – Non-necessities such as dining out, entertainment, pocket money, etc.

    Remember, you don’t have to give up everything that you want just because you’re trying to save money. Much like going on an extreme diet may eventually lead to a fried food and candy binge, trying to live by an overly restrictive budget may eventually lead to overspending and a shopping binge. So keep your numbers as realistic as possible.

  5. Now do the math. It’s quite straightforward: subtract your anticipated expenses from your net income.
  6. Do you have a positive number at the bottom of the page? Great! Add that leftover number to either the savings/investment or debt repayment categories.
  7. Got a negative number at the bottom of the page instead? Don’t freak out. Have you been too generous with yourself on the grocery budget, or in any of the discretionary categories? Is there something that you’ve been categorizing as a necessity that really isn’t? Tweak the numbers, as needed, to correct these issues. Dealing with a budget may mean doing some adjustments here and there until you come up with a system that you can work with for the long term.
  8. Review your budget and make sure it’s realistic. If you’re still seeing red, it may be the case that you’re finding it hard to live below your means. If you’re not earning enough to cover your necessities, then you’re going to need to get tough with yourself. Cut out anything that isn’t necessary to survival: cable or satellite television, Internet access, smoking (or other vices), eating out, etc. As you make these decisions, you should then terminate accounts, change service plans, and/or take other needed actions to effect the necessary changes. You may need to consider a career change to increase your salary or take an additional job for the extra income. You may also need to swallow your pride and seek help from family, friends or a local aid agency, especially if your situation places you or your family’s health and/or safety in jeopardy.
  9. Take your budget seriously. Once you’ve got a working budget, treat it like a living, breathing member of your family. Pay attention to it regularly to make sure that it still paints an accurate picture of your lifestyle. Tweak the numbers as necessary. For instance, you may want to budget more toward groceries during the holidays, but find that you can afford to trim entertainment expenses since you’ll be spending more time at home with family. Watch out for upward creeping numbers as well, as these can often indicate that an old habit, like swinging through the drive-thru for breakfast a couple of times per week, may be sneaking back in.

Above all else, don’t beat yourself up if your spending isn’t budget-model perfect every month. Expenses happen, and the purpose of the budget is not only to keep you on track with your saving or debt elimination goals, but also to help you weather the unexpected.

Once you’ve got some money freed up, you may want to check out some high yield investment opportunities for those funds.

Copyright © 2009 The Digerati Life. All Rights Reserved.

{ 22 comments… read them below or add one }

Kristy @ Master Your Card February 4, 2009 at 12:16 am

These are great tips! The first time I sat down to write a budget, I was horrified when I added everything up. I was living so far beyond my means that I was skipping payments on bills and moving money from credit card to credit card to make payments. I was not in a good situation. It was tough, but I made the call to get rid of the excess and get serious about my savings. I did just about everything on this list – including getting a second job!

Tracking your expenses can be difficult, so what I found that worked for me was a little notebook where I recorded everything I spent, down to the last penny – be it with cash, check, or debit card. If you’re not used to writing it down, it can be hard to do at first, but the benefits of having a budget in place were enough to sway me on making it work.

Thanks for sharing!

Patricia February 4, 2009 at 2:32 am

Thanks for sharing your tips. Since the economic crisis last year, I’ve been really stressed with managing my expenses.

Carole Woods February 4, 2009 at 6:08 am

Awesome advice,it is so current considering the overall financial picture of our society. If we all would be honest about where our money is going,without beating ourselves up,it can give us more freedom. It seems backwards to say,but after doing the same with our budget although I used a book by a Christian author with tear out pages, I was able to be a stay at home Mom without giving up as much as I thought I would have to. Granted we did not have the cable or Direct TV, but was it worth have just five channels to stay home with my daughter who had special needs-You bet! One thing also you may want to include is charitable giving,we tithe and that comes out first but on taxes at the end of the year it saves our butts. Money is just another tool one needs to learn to work in life, in order to grow up in other areas emotionally it is necessary to gain control over it. Thanks for the great read.

Mr. Imperfect February 4, 2009 at 12:20 pm

For the longest time we referred to our budget as the “B” word. We never really understood the dynamics of a budget though, and once we got the hang of it and stopped trying to make everything absolute it worked well.

These tips would have been great to know when we started our financial journey, and I am sure they will help many others with theirs. Great post! Have a great day!

Craig February 4, 2009 at 2:15 pm

Set a plan is the best way to start, then begin budgeting off of a week at first for very beginners, and work towards a month. budgeting for the month is what most people do and I don’t think you should budget for too long down the road cause things always come up.

Travis @ CMM February 4, 2009 at 2:19 pm

Creating a budget was the best thing I’ve ever done. I just wish I’d done it years earlier. It haunts me, the money I could have saved. Oh well better to start late than never.

jim February 5, 2009 at 7:35 am

I think there’s great value in just planning a budget, you get a tremendous amount of insight into your own spending and your own needs just be planning for them.

On the flip side, I spent a few months just tracking spending before I started a budget. Without knowing where you are, it’s hard to set a plan. A week or a month may not be enough time.

Mike Myers February 5, 2009 at 12:23 pm

Great tips. I am going to be passing this along to some friends that need some help/guidance with their personal budgets.

old car buff February 5, 2009 at 12:56 pm

Whatever system you use should allow you to compare actual spending vs budgeted spending. For me this is where ‘the rubber meets the road’. The variances between ‘plan and real’ are what you need to focus on once you have your budget up and running.

Spending a few minutes every day/once or twice a week is easier than inputting all the ‘actual spending’ data at the end of the month. Plus if you are overspending in a category, it reminds you to scale back for the rest of the month. (When I started budgeting, I used up my ‘eating out’ budget for the month in the first week! – “hello pbj lunches!”)

watch house February 5, 2009 at 4:25 pm

Budgets for me is more like a “Do i have extra money to spend.” “How much extra do i have to spend” and the most important question “should i spend it”

Ann June 30, 2009 at 8:59 am

There will always be expenses that are unexpected that will pop up from time to time. By following a budget consistently, you should know how to make it work each month.

Bairds July 15, 2009 at 9:37 pm

I really think that it is so important to plan out our budget. I like the thought steps that you have put in your process! If we think about our budgeting, it will be on our minds as we do our shopping. Having it on our minds will help us to not over spend!

Jen August 14, 2009 at 9:50 am

Thank you so much for posting about this, I have been wanting to do a budget for myself and family. We have a family of 6, including 2 year old triplets plus a 4 year old, all girls. I love this, great blog. Thanks for posting this I will be doing this myself

Kerri November 14, 2009 at 10:57 am

Thanks for the post. I have a great tool to recommend to streamline steps 1-8 you mention: the first steps to understanding financial health. A new Web site called Debt Spark, provides a basic snapshot of cash flow. Users input expenses, income and debt and the program stores the information and tracks it over time. It’s simple and needed. Perfect for budgetary novices to get on board responsible spending!

Paul November 20, 2009 at 9:44 am

It seems like most people just don’t keep track of their spending.

I like to know where every dollar goes so I can stay within my budget at all time.

Cap March 20, 2010 at 6:53 pm

I am actually a cheap, cheap fellow. This may explain why I’m still single 😉 — but 20% kidding aside, I really do try and watch the way I spend my money. Like many other personal finance bloggers, I don’t particularly set or follow a certain monthly budget. This doesn’t mean that there aren’t merits to setting a budget — after all, understanding your income and expenses can be a very powerful tool to control your finances — but it simply means that I have a fairly good understanding of how much money I make and how much money I ultimately spend. The fact is, there really isn’t a lot of budgeting to do when you simply don’t spend money beyond basic necessities. Of course, ymmv.

Ellen May 7, 2010 at 3:33 pm

This is a very well written piece. In addition to the budget, one also needs to save for a few months of expenses in case of emergency. Something to fall back on if you lose your job, have large medical expenses, the car needs major expenses. While you are at it, why not sell that expensive car and buy a paid for car which will get you to work but may not look the best. Eliminating that car payment will do wonders for your budget.

Silicon Valley Blogger May 7, 2010 at 4:23 pm

@Ellen and everyone else,
Thank you for the tips. To maintain a budget, it’s really just all about living within your means. I know way too many people who spend for unnecessary items — many times, they are bored and have nothing to do, so they go off and go shopping! Best advice I can give is that you should spend time doing things that are free and can still be enjoyable. In my case, I blog. It is my hobby and business and it doesn’t cost me anything 🙂 (that I don’t already pay for, such as electricity and DSL).

Katherine October 16, 2010 at 5:10 pm

I am reading your article as part of my research to writing one myself about how to create a budget. I don’t usually comment on articles I read as research but yours was especially well written. Nice job!

jysharp2003 December 4, 2010 at 9:30 am

I appreciate the wonderful site. With years of failing because of manual entry to budget spreadsheets etc, I found importing my bank statement for tracking is the truest way to make a budget work long term. My MS Money application no longer worked so I searched and found a program called bank2budget. This program cuts my paying bills and tracking expenditures by 90%. I spend about 1 hour a month and it can show you trends and many other charts. It requires MS Access version 2002 or higher though.

Good luck to us all.

Sheila January 3, 2011 at 3:34 pm

Thanks for the information. I like using budget software to help me out. I budget for short term as well as long term goals, and this habit has helped me keep my goals in check.

EasyBudgeting January 7, 2011 at 4:25 am

A very well written post and great advice.

I created a user friendly budget planner using Excel at which has helped hundreds of people worldwide. It may be of some assistance to your audience.


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