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Is a budget an evil beast to be avoided at all costs, or a helpful tool to reach your financial goals? How to make a budget in 5 simple steps. And more importantly, how to make a budget you’ll actually stick to — a budget that truly works for you. 

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How to make a budget

It IS possible to make a budget and stick to it. And it’s simpler than you might think.

Let’s be real. It can be hard to make a budget. Even harder to make a budget you’ll actually stick to. Take it from me. I know!

I’m married to an accountant. He always wanted to live by a budget. I, on the other hand, always felt like a budget put me in a straightjacket. Turns out, a budget doesn’t (necessarily) put you in a straightjacket. It gives you a sense of freedom. It can, anyway. 

A budget can truly be a great financial organizational tool. And without it, it’s very easy to get yourself in a heap of financial trouble. Your budget can help you feel and be more in control of your money. It helps reveal your missteps and helps you plan to achieve your goals and dreams.

On the flip side, they don’t work for most people. Why? Because we feel limited by them. Like I did. So we’ll share tips about how to make your budget one you’ll actually stick to. How to make a budget that will work for you. 

But first, let’s talk about how to create a budget in five simple steps. It’s not rocket science. But the first time around, you’ll need to figure out a few things. Don’t worry, it’s not that hard.

So grab your favorite beverage and your significant other, and let’s get going…

How to Make a Budget in 5 Simple Steps

A budget is a key financial tool. It’s a written (or digital) plan for each dollar that passes through your hands or your bank accounts. Getting to your initial spending plan requires you to know and track two things:

  • Your after-tax income
  • How much you’re shelling out every month (including debt repayment, savings, and irregular expenses)

Budgets should cover all your needs and some of your wants, plus emergency savings and future needs.

Start by gathering all your pay stubs and monthly bills for the past three months. Log into your bank and credit card accounts and pull your statements. You’ll need these for your initial inventory process. Be sure to add in any annual or semi-annual payments such as insurance, property taxes, and travel. Also grab some paper or Excel to make notes and log your numbers. And your cell phone calculator.

Ready? Okay, onto step #1.

Create Your Budget Step #1: Calculate your total monthly income.

You have to know what you’re starting with. So list all monthly income. Do not skip this step. Include everything – including your main job, plus any side hustle or rental income (after associated expenses), alimony, child support, or whatever. Include all sources.

If your income is inconsistent, average the past three months, and use that. Or use the amount from last year’s income taxes, divided by 12, if your income is variable.

For example, monthly income as follows:

  • Take-home pay from job (from pay stub)   $3,000
  • Spouse’s take-home pay                              $1,800
  • Side hustle income                                           $500

Yay… done with step #1. See, that wasn’t so bad. 

Create Your Budget Step #2: Add together all fixed monthly expenses.

First, what’s a fixed expense? It’s all your non-discretionary expenses. Stuff you have to pay, no matter what. Your rent/mortgage, utilities (gas, electric, water), cell phone bill, basic food, car payment, student loans, minimums on credit cards (if you’re not paying them off in full every month). These numbers should be as accurate as possible.

How to make a budget

Accurately calculating your fixed monthly expenses is a critical part of making a budget that you can stick to.

Where to find these numbers:

  • Bills, such as utility bills (average the past three to six months — utility bills vary throughout the year)
  • Credit card statements
  • Bank statements
  • Intermittent bills (home, auto, and life insurance, property taxes, HOA fees…)

If you run everything through credit cards to earn rewards, your credit card statement will be a valuable and quick source of information. Also, check your bank statements, since those will include checks you’ve written and automatic payments from your bank account. Finally, check against your bills to make sure everything is included accurately.

Your fixed expenses might look something like this:

  • Rent                                       $1,500
  • Electric bill                                $40
  • Gas bill                                      $35
  • Water bill                                  $30
  • Cell phone bill*                         $70
  • Auto insurance (per month)   $70
  • Groceries                                 $400
  • Student loan payment           $600
  • Car payment                           $450

Be more inclusive, rather than less inclusive, at least at the beginning. It’s revealing to see with your own eyes where your money’s going. If you initially forget something, just add it when you remember it.

*By some definitions, a cell phone is a discretionary expense. Except that most people use them as their primary phone today. So I’m including it in fixed expenses.

Create Your Budget Step #3: Calculate your discretionary expenses.

Discretionary expenses are things that aren’t absolutely essential. Sometimes it’s hard to decide if an expense is fixed or discretionary. For example, food is a need. But is steak and wine? The lines can get blurry. Some things aren’t necessities as much as they’re “darned hard to give up.”

You discretionary expenses include entertainment, toys, eating out, gifts, travel, clothing, alcohol, and personal care. Gasoline and car repairs (or car purchases!) could go here too. Amounts are adjustable based on what you can afford.

If you buy stuff from Amazon (who doesn’t?) scan your orders for the past three or six months and see where all the money went. You won’t get this detail on your bank statements. Amazon could be just about any category.

For variable expenses, you might add:

  • Vacation/travel            $200
  • Dining out                     $90
  • Entertainment              $40
  • Hair and beauty           $50
  • Clothing                        $60
  • Miscellaneous             $150
  • Charitable donations  $100

Don’t forget periodic expenses. For example, if you buy a side of beef once a year, take the total cost and divide by 12 months. Or make a special line item for it in your discretionary expenses category.

Create Your Budget Step #4: Dream… then set your financial goals.

Pause from your monthly spending for a moment.

Plan your big financial goals. What’s your vision for your financial life? Life in general? An ancient proverb says, “Where there is no vision, the people perish” (Proverbs 29:18).

Top athletes visualize their strokes, game plan, and outcomes. That’s why they’re successful. Visualize your own financial outcomes. You’re more likely to achieve them. Create that vision today. We recommend creating a vision board.

How to make a budget

Dare to dream a little! It’s an important part of making a budget that fits YOU.


Think about your ideal short-term (1-year) goals, and longer-term dreams. Want to…?

  • Pay off all your student loans.
  • Build a 3- to 6-month emergency fund.
  • Pay for your wedding with cash.
  • Save for a down payment on a house.
  • Fully fund your retirement accounts.
  • Save for a dream trip.
  • Set aside money for your child’s education.
  • Save for a replacement car.

Once you write your big audacious financial goals, make them a monthly “expense” so you fund them.

Say you want to really knock down your student loans this year. You cut your discretionary spending, to be debt-free as soon as possible. So, you decide to pay off an extra $600 per month. That’s $7,200 of principal paid off!

Add that as a line on your budget. So it’s part of your monthly cash flow plan… in other words, your budget.

Do the same for other “big” goals. Otherwise your extra discretionary money may just vanish into thin air.

Create Your Budget Step #5: Subtract your expenses from your income. Adjust  categories as needed.

Finally, take your total income from step #1… and subtract the total of all your fixed + discretionary expenses from it.

Did you get a positive or negative number? Or did you just break even?

If you were positive, that means you make more than you spend. Yay! Now you can budget more long-term goals – like retirement, your child’s education, a house.

Did you break even? That’s good but not great. You have exactly the right amount of money. But heaven forbid you made any mistakes in your calculations. You have no margin. Adjust to create more margin in your budget. In case of a real emergency. But you do have an emergency fund for that, right?

If you’re negative, you’re spending more money than you’re earning. Not good. Adjust by spending less in discretionary areas. Find ways to cut your fixed expenses. Boost your income. Maybe all of the above.

Quick ways to slash discretionary spending? Reduce entertainment, cut the cable, eat out less, skip a vacation this year, reduce gift-giving… Remember, this isn’t a life sentence. It’s temporary, to get things on track. Living beyond your means is the life sentence.

Of course you can also target your fixed expenses. Find a roommate to share living expenses. Sell your car and use public transportation. If appropriate, sell the second car and make do with one.

Finally, if you’re married your adjustments might need some kind-hearted negotiating. Read our article about how to talk with your spouse about money.

Whichever category you fall into, you need an emergency fund.

Congrats! You finished step #5. Now you’re done with the hard stuff. All you have left? Adjust. Monitor. Revisit periodically.

Your Budget is a Working Tool

A few rules for the road. Your budget is a working tool – not numbers written in hard concrete.

It’s a good idea to review your budget together (if you’re married) once a month. That way, you can look at your statements and still remember what the charges were for. You can tell if you went over in one category, and decide if you can compensate the following month.

Note that it’s much easier to correct course after one month than after a whole year. If a ship strays off course and stays on the wrong course over time, it gets so far off track that getting back on the right course is far more difficult, if not impossible. Same with your budget.

Also, assuming you’re married, the longer you go without talking about that elephant in the room the more likely you are to create big money problems in your relationship. As we say in our article on how to talk with your spouse about money, frequent conversations to discuss small problems or questions can often spare you from major blowups.

Two Sides to the Budgeting Equation

Budget-makers often focus only on the spending side of budgeting. They zero in solely on the expenses that seem to destroy their budget. To do that, they’ll swear off their morning coffee and won’t buy any clothes for the next year. Those are great changes.

But there’s another way to improve your spending plan… and it may be more feasible.

That’s the income side of your budget. This part is also negotiable, discretionary. Try fighting for a raise at work. Take a new job with higher take-home pay. Pick up a side hustle or two. You don’t have to accept your current income as cast in stone.

How to Create a Budget You’ll Actually Stick To

Many people complain that budgets don’t work. That’s often true. Especially if you don’t work with your budget. Tools don’t work unless you use them.

But there’s something else at play. We don’t follow budgets because we’re emotional beings. Our emotional needs cry out for fulfillment. We don’t want to feel limited!

Also, if you’re married and fight about money or the budget, that becomes a disincentive to budget. Again, you’ll be well-served by learning how to talk about money with each other.

Tips for how to make a budget you’ll actually stick to:

1. Use a budget style you love.

Consider budgeting apps, software, and other automation tools like Mint. Mint automates your money and saves you time. It also syncs with your bank accounts, credit cards, and investment accounts. What’s more, spouses can use it to track finances together. If you prefer to stay offline, there’s always your trusty Excel spreadsheet or the envelope method.

Whatever you do, find a method that works the way you do. A plan you like. If you hate it, you’ll never use it.

2. Automate, automate, automate.

This will make your life easier and your budget work. I love this method! It’s totally my favorite. 

If possible, set up direct deposit for your paycheck. Have payroll automatically deduct your 401(k) money. Arrange for automatic withdrawals to the following, set for the day after your paycheck clears:

  • First account, funds for all intermittent payments like insurance and property taxes, pro-rated at their monthly rate
  • Second account, monies for an emergency fund, a set amount from each paycheck
  • Third account, your rent or mortgage payment and your student loan payments
  • Fourth account, any other savings, retirement, or brokerage accounts
  • Fifth account, an account for shorter term goals such as a vacation or furniture

Set up an automatic payment out of the mortgage/rent account for the first of every month. And your student loan payment for the day before it’s due. As well as anything else you can create automated withdrawals or deductions for.

Boom! Now you’ve covered the important fixed categories. They’re coming out of every paycheck and you never even see them. Most people don’t miss the money. And once you’ve made the decision, you don’t have to depend on “willpower.” It just happens.

Now, if you hate budgeting, you have a great deal of freedom with the rest of your budget. Yet you’ve made sure your most important spending categories are in order. It frees you up in other categories. So don’t monitor them so closely if you don’t want to. 

3. Track all cash expenses of any significance.

Cash is easy to lose track of. Track it. But don’t try to track every penny. It’ll drive you crazy. And even accountants don’t do that…

4. Put enough wiggle room in the budget for an occasional treat, fun outing, or trip.

A budget you dread is one that’s doomed to fail. It’s very common to become so overbalanced in one area of expense (for example, housing) that you have no wiggle room to enjoy a night out. That’s sure to induce resentment. If housing is robbing you of sleep or causing fights, you might want to think about moving to less expensive digs. Or get a side hustle and earn more. 

5. Be kind when negotiating spending adjustments with your spouse.

No one wants to be beat up with a words or a sledgehammer. You’re both on the same team. Look the same direction down the road of life.

Honestly, I think a big reason I felt like a budget was a straightjacket is because there was so little wiggle room that I completely resented it. I saw the budget as a killjoy. Give yourself permission to have some fun and enjoy some hobbies.

Also, admit that not everyone is nerdy enough to want to track every penny. Or dollar. In many relationships, one person wants to track everything, and the other person doesn’t want to track anything. Try to find some middle ground.

Ultimately though, when you see a budget as an enemy instead of a tool, you may sacrifice your long-term goals. That’s why I love #2 above so much — automation. You reach your goals without so much thought, attention, and tracking. Most of it’s already done and decided in advance. To me, that’s perfect for just about everyone — nerds and spenders alike.

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