How to Make a Budget

Learning how to budget involves figuring out your income and expenses, allocating money based on how essential each expense is, and diligently tracking your progress. You’ll need to prioritize paying bills and other essential expenses, then savings and investments, and hopefully you’ll have a bit left over for yourself. You’ll also need to periodically reevaluate your budget and hold yourself accountable for any lapses.

While that might sound complicated, and it is to some degree, we’ve put together a plan to streamline the budgeting process as much as possible and help you succeed financially. With 74% of Americans saying that rising costs are the biggest budgeting challenge for them, according to a recent WalletHub survey, it’s more important now than ever to learn how to budget.

Try WalletHub's free budgeting tools!

Key Things to Know About Making a Budget

• Distributing your money: Every person’s budget will be different. It all depends on how much money you have at your disposal, how big your essential expenses are, and what types of things you want to prioritize. A common place to start is the 50/30/20 approach: spending 50% on needs, 30% on wants, and 20% on savings, investments and debt payments.
• Budgeting tools: There are apps and other tools, many of them free or very cheap (like WalletHub Premium), that can help streamline the process of budgeting and make it a lot more organized. The best programs can automatically track your earnings and purchases for you, doing most of the legwork.
• Expenses to prioritize: The most essential things to include in your budget are monthly expenses you can’t go without, such as food, rent payments, utilities and insurance. Your next priority should be important financial goals that help you reduce your existing debt load or prepare for the future. You can add in non-essential things you want with any remaining money, but you may need to cut some items.
• Good budgeting behavior: Just building a budget isn’t enough – you also need to build the discipline to stick to it. Honesty about whether or not you meet your goals is important, so that you can adjust either your budget or your behavior in the future.

Below you can find the six steps that are essential for building your very own budget.

Steps to Create a Budget

1. Gather Information About Your Income and Spending
2. Set Goals for Your Budget
3. Choose a Budgeting Tool
4. Determine Your Priorities
5. Make a Plan
6. Track All of Your Income and Expenses
7. Reassess Your Budget From Time to Time
8. Best Budgeting Tips

Step 1: Gather Information About Your Income and Spending

The first step in making a budget is figuring out how much you earn and how much you spend. Without knowing that, it’s impossible to plan for the future.

Start by determining how much income you’re bringing in every month, after taxes. If your employer withholds tax and you make a consistent amount of money every paycheck, that process should be pretty easy. If your income is inconsistent or you have to estimate your own taxes, it can be more difficult, but you can always use past years’ taxes for a guide.

Once you have a solid handle on how much money you’re bringing in, you’ll need to calculate your monthly expenses. Start by tracking your spending for a month to see exactly how much you’re spending and on what exactly. You can get most of this information from your credit card and bank statements, but save receipts for (or just write down) anything you buy in cash.

Expenses to Include in a Monthly Budget

• Mortgage/rent payments
• Other installment loan payments
• Groceries
• Gas or transportation
• Utilities
• Insurance
• Child care or pet care, if applicable
• Dining out
• Monthly subscription services
• Regular expenses for hobbies or your children’s activities
• Money set aside for savings
• Investment contributions
• Charitable donations
• Other miscellaneous, non-essential expenses

You may have other expenses that aren’t part of your normal monthly budget but come around every once in a while. For example, you might go on a vacation or have unexpected medical bills or home/auto maintenance costs. You can prepare for these types of expenses by setting money aside in an emergency fund or your regular savings during the “setting goals” stage of budgeting.

Step 2: Set Goals For Your Budget

A budget is a list of goals at its core. The main goal, of course, is always to spend less money than you’re bringing in. But you’ll also have subgoals for other financial tasks you want to accomplish. For example, you may want to get out of debt in 24 months. Or, maybe you’d like to save up for a $3,000 European vacation next summer. You may not even have some grand plan in mind, but rather might just want to stay organized while paying all your essential bills and saving and investing for the future.

No matter what your goals are, some financial maneuvering might be needed to achieve these objectives – increasing monthly savings or debt payments by a certain dollar amount for a certain period of time, for example. Budgeting will give you a clearer picture of how much money you need to put toward each category every month in order to achieve your goals.

Common Budget Goals

• Get debt-free by a certain date: If you have debt from credit cards or loans, you may want to set a goal to pay it off within a set time frame to minimize your interest and improve your credit score. This requires putting a certain amount of money toward those existing debts each month.
• Save up for a big expense: Most people can’t afford to pay for an entire vacation, home renovation, or other large-scale expense just from a single month’s pay, on top of all their other expenses. Allocating a set amount of money to savings each month will help you build up enough over time.
• Build an emergency fund/rainy day fund: Unexpected situations like the loss of a job, a hospital visit or a car accident can squeeze you financially, so it’s essential to have money to fall back on. If you don’t have a fund for these situations yet, you should prioritize setting money aside in a bank account until you’ve covered at least six months’ worth of your regular expenses.
• Grow your investments: Investing is extremely important because it increases your chances of having a comfortable financial future, even after you retire. It’s always a good idea to put at least a small amount of money toward a 401k, IRA, and/or non-retirement brokerage account each month.
• Stop overspending: Many people don’t realize how much they spend, or how often they fall victim to impulse buying. By setting a budget and resolving to stick to it, you reduce the temptation to overspend and focus on the purchases that are important.
• Get organized: In addition to whatever financial goals you have, you also may want to budget simply for the sake of being more informed about how much money you have and how you’re spending it.

Step 3: Choose a Budgeting Tool

Budgeters have a host of effective budgeting tools at their disposal – from old-fashioned ledgers to websites and apps that do all the complicated math for you. Your task is to cut through the clutter and find a reliable system that works for you.

How you structure and record things ultimately depends on what you’re budgeting for, your technical skills and even what suits your eye. You don’t need anything more than a pen and paper, but using online tools or mobile apps can be a lot more convenient.

Popular Budgeting Tools

If you’re interested in a free template or just some inspiration, check out WalletHub’s editor’s picks for the Best Budget Templates.

Step 4: Determine Your Priorities

Now that you know how much money you’re bringing in, how much your expenses cost, and what budgeting tools you’ll use, it’s time to figure out which of your expenses to prioritize.

To simplify things, let’s break down the list of common expenses into three categories. High priority expenses are ones that you absolutely need to include in your budget no matter what, like essential bills. You might also hear these types of things referred to as “needs.” Medium priority expenses are things like saving and investing. You definitely should include them in your budget, but you should only allocate money toward them after you’ve met your immediate needs. Low priority expenses are things that you may want to include, but that ultimately could get cut out of your budget if you’re in a pinch. You can also refer to these things as “wants.”

High Priority Expenses

• Mortgage/rent payments
• Other installment loan payments
• Groceries
• Gas or transportation
• Utilities
• Insurance
• Child care or pet care, if applicable

Medium Priority Expenses

• Money set aside for savings/future big purchases
• Investment contributions
• Charitable donations
• Regular expenses for hobbies or your children’s activities

Low Priority Expenses

• Dining out
• Monthly subscription services
• Other miscellaneous, non-essential expenses

At this point, you’ve got the skeleton of your budget. Now, it’s time to put the meat on the bones by actually deciding how much to spend in each area.

Step 5: Make a Plan

Once you’ve categorized your expenses based on priority, then you can start assigning a certain amount of your income to each one. Doing this for your high priority expenses is easiest, since you likely already know approximately how much they cost each month, though certain things like heating or electricity bills can naturally fluctuate.

Choosing how much to spend on your medium-priority expenses depends on the goals you’ve set previously. For example, if your goal is to pay off a certain debt in 12 months, you’ll be able to figure out how much you’ll need to set aside each month to make that happen. The same goes for things like building an emergency fund – based on how many months of savings you want in the fund and your target date for meeting the goal, you can calculate how much to save.

Finally, any remaining money can be distributed among your low priority expenses. You may need to pick and choose which of those to keep in your budget.

50/30/20 Approach

Many sources suggest a 50/30/20 approach to budgeting, where 50% of the money goes toward your needs, 30% goes toward your “wants,” and the remaining 20% goes toward savings, investments or debt. In theory, this can help you stay organized while simplifying the budgeting process even further.

In reality, though, making your budget plan may not always be so simple. With the cost of living being so high, you may end up needing to dedicate a higher percentage of your money to needs. Between a mortgage or rent payment, utilities, insurance, groceries, gas and child care, essential expenses can pretty easily exceed 50% of a typical American’s take-home pay.

Because of this, it’s wise to minimize the amount of money you spend on things you simply want, and increase the amount you put toward your financial goals. Making sure you have a secure future by building at least some savings and investments is important.

Step 6: Track All of Your Income and Expenses

Once your budget plan is finalized and you’ve set it up within whichever budgeting tool you’re using, it’s time to start putting things into practice. That means keeping a careful record of how much money you take in and how much you actually spend every month. And even if you’re not able to meet your goals right away, or you slip up, it’s important to write that down so you get an accurate sense of your financial position. Nearly 1 in 5 people aren’t honest with themselves when making a budget, and that can hurt your finances.

Below is a quick rundown of how to track your expenses. Depending on what budgeting tools you’re using, this information may populate automatically (as is the case with WalletHub Premium), or you may need to enter it manually.

How to Track Your Budget

1. Record Your Income: The first thing you need to do is keep track of the amount of income you earn each month, even if you normally make the same amount. That way, you will be able to account for any windfalls, such as tax refunds, work bonuses, gifts, or other unexpected extra cash.
2. Log Your Expenses: You should log exactly how much money you spend on each of the categories in your budget, including both your purchases and any money you’re able to put in savings or investments.
3. Compare Income and Expenses: There should be a final total that compares how much you earned to how much you spent on everything. Having a detailed record of each month will help you determine if your budget is realistic or needs changes when you reevaluate in the future.

Step 7: Reassess Your Budget From Time to Time

Blindly logging numbers each month won’t do you any good. You need to consider what the numbers mean. How does your spending compare to budgeted amounts? Do you notice any larger trends that may warrant a change in approach? These are the types of questions you must ask yourself if you want to get something out of the budgeting process.

How to Reassess Your Budget

Take a look at your budget over the past few months. Compare the amount of money you planned to set aside for each expense to how much money you actually spent on it.

If you’ve managed to stick to your budget, you don’t have any extra money to allocate, and you’re still in the process of meeting your major goals, your budget is solid! Keep using it and reevaluate again in a few months.

If you stick to your budget but often find yourself with extra money, consider increasing the amount you put toward one of your financial goals, rather than spending more on luxuries. For example, you might put additional money toward paying off debt, invest more, or simply add to your emergency fund or regular savings.

If you’ve been regularly exceeding your budget, meaning you don’t have enough money for everything you planned, evaluate what it will take to fix the problem. Are your goals not realistic? Or, are you not being disciplined enough and need to change your habits? For example, if your essential bills are a lot more than expected, that’s a reason to adjust your goals. If you’re spending a lot extra on frivolous things, then you need to adjust your behavior.

If you’ve recently met any of your financial goals, you should adjust your budget by setting new goals. For example, if your goal was to put six months’ worth of expenses in your emergency fund and you accomplish that, you may want to set a new goal like growing your investments instead.

Best Budgeting Tips

The above steps establish the practical parameters for how you will use your budget. In addition to those guidelines, here are a few tips for making the most of your budget.

• Save a Backup: It’s simply too risky to have a single copy of your budget. So, photocopy your paper or save a digital copy on an external hard drive or a cloud account such as Dropbox.
• Leverage Excel: If you’re using a spreadsheet to track your budget, it’s worth the trouble to learn some of the useful features conducive to budgeting, including the ability to automatically add up numbers and use formulas to unearth interesting insights from data. Here are a few articles that will help you grasp the basics:
  • How Excel Formulas Work
  • Filtering & Sorting Data
  • Working With SumIF
• Find a Budget Buddy: Simply telling someone else about your budget plans is helpful because it adds accountability to the equation. Having someone to share in the process with is even better because you can act as each other’s support system.
• Make Sure You’re Committed: Drafted and forgotten budget templates can pile up as quickly as crumpled pieces of paper in a trashcan. But while the simple act of making a budget may have some therapeutic benefits and certainly provides practical perspective, the real value comes when you couple your budget with month-by-month (or week-by-week) expense tracking. Budgeted amounts are really goals, and goals necessitate follow-through and then follow-up.
• Try WalletHub Premium: WalletHub Premium costs $6.49 per month, and it gives you access to extremely helpful budgeting tools. You’ll be able to create a personalized budget that categorizes your expenses and can sync with your financial accounts to automatically track your spending. In addition, you’ll receive real-time alerts about important changes. You can also get access to some budgeting tools with a free WalletHub account, but without the automatic sync feature.

If you are looking for additional advice, you can find a whole host in WalletHub’s budgeting tips guide.

Ask the Experts: Budgeting Questions

For more insights into the budgeting process, including effective strategies and money-saving measures, we posed the following questions to a panel of leading personal finance experts. You can check out their bios and responses below.

1. What distinction do you see between people who simply make budgets and those that actually adhere to them?.
2. Do you have any tips for actually sticking to a budget once you’ve created it?
3. What do you believe is the key to effective budgeting? What tools are most conducive to this process?
Over what time period should people make their budgets?
4. Is any skill as important to personal financial management as budgeting? And, with that in mind, why don’t more people budget?
5. How can people deal with the pressures of inflation while making a budget?

Ask the Experts

Scott M. Spann
CFP®, Ph.D., Personal Financial Coach at Financial Finesse, Inc.
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Leon Chen
Assistant Professor of Finance at Minnesota State University, Mankato, College of Business
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John Gilliam
Associate Professor in the Department of Personal Financial Planning at Texas Tech University
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Susan J. Crain
Professor in the Department of Finance and General Business at Missouri State University
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