(Inside this post you’ll learn budgeting basics, how to create your first budget, common budgeting methods, and what makes a budget work for your goals and priorities.)
What is a Budget?
Before we jump into creating a budget, let’s lay the foundation. A budget is simply a written account of your monthly income and expenses. Typically, you list your income at the top of the page, then your expenses underneath. Expenses include items you pay for on specific dates, like your bills, and other open-ended purchases, like groceries, entertainment, or eating out. They do not necessarily have a due date. A budget also includes your allocation to savings each month. At the end of the budget, you will do a little math to subtract your expenses and savings amounts from your income amount to see if you stayed “within budget,” meaning you didn’t spend more on expenses than your income can support.
Why Do I Need a Budget?
If your bills are paid on time and your bank account isn’t negative, then why would you need to spend time creating a budget?
Consider this: What if a budget is less about tracking your income allocation and more about tracking your intention allocation?
Think of it this way: When you budget, you are creating a plan for your money. Yes, a large portion of that income is going toward needs and everyday expenses, which you may be managing just fine sans budget, but the rest falls through the cracks if there isn’t intention behind your spending. When you budget, that budget becomes the tool to reach your short- and long-term financial goals and ensures you prioritize your spending in a way that adds value to your life and legacy.
Income and intentionality work hand in hand in your budget. Your budget should help you:
- Know where your money is going.
- Plan for recurring, discretionary, and irregular expenses.
- Reduce financial surprises.
- Prioritize values and experiences that are important.
- Decrease financial stress and overwhelm.
On the surface, a budget is a list of your income and expenses, but underneath that list lies your values, priorities, and financial goals. That’s what makes a budget more than a list of numbers. It’s a plan for using your money in a way that supports the things that matter to you.
A Budget Gives You Permission to Spend
Oftentimes, budgeting carries a negative connotation. For many, being on a budget is akin to being on a diet. Budget categories become a list of rigid rules: Don’t spend money on this. Better cut your spending there. You should save more. But I want to challenge you to flip that narrative on its head.
When you establish a budget, you give yourself permission to spend your money how you want to! As noted above, the budget doesn’t just monitor your spending; it gives you permission to spend on the important and fun things. When you go to book the plane ticket without a second thought because you’ve budgeted travel funds each month, it’s freeing! When you can buy a friend’s coffee or pick up a bakery sweet on a whim because you’ve set aside funds for those instances, it removes any overthinking or guilt that you may have spent that money better elsewhere.
The time you spend setting up your budget pays off over time. You spend less time worrying about what a purchase will do to your wallet and more time thinking about what that spending makes possible in your life.
Before You Create Your Budget
Now, let’s prepare to create your first budget! Before you grab your calculator, take a look at your finances to gain an understanding of where you currently are and where you want your budget to take you.
- Gather income information. Review your pay stub. How often are you paid? Is it the same amount each time, or does it vary? If it fluctuates, take the average income of the last three months to determine your income amount to work with. You will want to use the income amount remaining after taxes and benefits are withdrawn (this is referred to as your “take-home”), not your gross earnings.
- List your bills. Gather all your recurring bills and note their due dates and average amounts.
- Review your bank account and credit cards. Where has your money gone in the past month? List categories that you have spent your money on. These could be broad, such as “Gasoline” and “Groceries,” or specific, such as “Weekly lunch with Katie.” Take inventory of your most common transactions to start building the foundations of the expenses you’ll need to consider within your budget.
- Identify debt and savings goals. Next, list out any debt obligations you have, such as auto loans, student loans, etc., and any savings goals where you want to allocate funds.
- Note irregular expenses. Do you have quarterly pest control? Semi-annual insurance premiums? Annual property tax payments? Use a calendar to list these irregular expenses, plus anything else that comes up throughout the year that might require an extra budget category in a certain month. These could be birthdays, vacations, or something similar.
How to Create Your First Budget
Now that you’ve gathered your information, you’re ready to create your first budget! For now, we will write down our budget, but you can choose a specific budgeting method once this framework is complete. Don’t overthink these steps; just start with the information you have and create a plan that you think might work for the next month. After your first month of budgeting, you will review your budget to make adjustments and updates for the following month.
Step 1 — List your monthly income. Using the amount and frequency you found while gathering your income information, write down how much you expect to bring in this month. Don’t forget other non-employer-related income as well. These could include earnings from side hustles, retirement or social security income, monthly benefits or subsidies received, or payments received from roommates to cover shared expenses. You want to note all income sources and amounts that you consistently receive. If you only make a few sales here and there throughout the year from your side hustle, don’t count on that income in your monthly budget.
Step 2 — List all recurring bills. Next, make a list of all monthly recurring expenses. Consider items like your mortgage or rent, electric bill, phone or internet services, and daycare expenses.
Step 3 — List all discretionary expenses. Now, think about all of those categories you recorded while reviewing your bank account. List out all of those categories, and assign a spending number to that category. For example, Groceries – $500, Entertainment – $100, and so on. Don’t worry too much about the specific dollar amounts for now; just use your best judgement of what you normally spend on a monthly basis as a starting point. You can always adjust these amounts later if needed.
Step 4 — Add in irregular expenses. Consider what expenses you have coming up this month. Is your yearly Sam’s Club membership drafting this month? Do you have an insurance premium due? Review your irregular expense calendar for this month and add in these costs. No upcoming expenses this month? You could leave this category blank for now, or set aside funds for the next expense!
Tip: Check out these additional strategies for managing your irregular expenses with a consistent monthly amount.
Step 5 — Allocate funds to savings and debt. If you didn’t list your monthly debt payments in step 3, add them in here. Next, list out the total amount per month you’d like to transfer to a savings account.
Step 6 — Check your numbers. Now that you have listed all of your income and all of your expenses, it’s time to see if you are “on budget” or if you need to make adjustments. The goal is to have your expenses be less than or equal to your income. If your expenses total more than your income, go back to your discretionary expenses and adjust them accordingly to fit within your means.
Step 7 — Follow the budget this month. You’ve done the hard work of creating the spending plan; now it’s time to follow it! Regularly check in with your budget to see if you are staying on track with your spending and meeting your savings goals. In the beginning, this will likely require you to track your expenses throughout the month. Tracking expenses also allows you to see if your discretionary spending allotments are reflective of your true spending throughout the month. This spending data will help you refine your budget the next time you create one.
Common Budgeting Methods
Once you’ve mastered the basics of creating a budget, you’ll realize that there are several ways you can organize your budget. Here are some of the most common ways to budget:
- Traditional Monthly Budget — This is the type of budget that we just created! You list out all of your income and expenses throughout the month, broken down by specific spending categories.
- Zero-Based — Similar to the traditional budget, this method has you allocate every dollar to a specific spending or savings purpose so that your planned income minus your planned spending equals zero.
- Budget-by-Paycheck — Rather than planning your expenses on a monthly basis, you create a series of “mini budgets” based on the frequency of your paychecks. Each paycheck will cover a different expense for the upcoming pay period. So, you might budget weekly, bi-weekly, or bi-monthly with this method.
- Cash Envelope — This method utilizes physical envelopes and cash for predetermined spending throughout the month. Nowadays, you can also use this method digitally with apps or separate spending accounts.
- Percentage-Based — This simple framework divides your income into three broad spending categories based on a percentage of your income. This method is also commonly referred to as the 50/30/20 budget.
Each method has its pros and cons, but the most important thing to consider when choosing a method is how YOU naturally think about organizing your money management throughout the month.
Psst… This is a topic we dive deeper into in our Budget Blueprints Workbook!
Your First Budget is a Learning Experience
Once you’ve gone through a month of budgeting, it can feel discouraging to discover you were way off on your category allotments, you forgot expenses, or you simply didn’t review it as often as you intended. These “mistakes” are not only okay for your first month, but they are expected!
Your budget will not be perfect the first month. You just don’t know where your money is actually going until you start to monitor it closely, and that means your first budget is not your final budget. Think of your first month as a test drive for your budget. You’ll get to know the ins and outs of your bill pay, spending habits, and cash flow. Once you get more comfortable with these components, the next budget you make will account for any “mistakes” you made in the first month. Your first budget is simply the starting point. What matters is what you learn from it and how you use that information to build next month’s budget.
What Makes a Budget Actually Work?
Once you’ve created your budget, how do you make the plan you created on paper work for your real-life spending habits and expenses? Keep in mind these three things as you build upon your budget to create a monthly financial routine:
- Consistency — Regularly reviewing your spending keeps you on track with the plan you’ve laid out for the month. Set aside a consistent time to check that your bills were paid, you transferred money into savings, and you are not over spending in any areas.
- Systems — The written budget is only part of your overall budget system. You’re also managing your bank accounts, credit cards, financial goals, and more each month. These pieces keep you on track throughout the month.
- Flexibility — Have the mindset that you will need to adapt and adjust throughout the month to stay on track. This might mean that because groceries were more expensive this month, that decreased your entertainment amount. Or, you were hit with a large unexpected expense, and as a result, you missed your savings target. These adjustments are not signs that you are failing at budgeting; rather, they are adapting to changing circumstances without completely derailing your finances.
A Budget is Only One Part of a Budget System
By now, you’ve seen that creating a budget is more than just listing your income and expenses. There are several moving pieces behind the budget that make you feel confident in your overall monthly management. These moving pieces create your budget system. Once you have a budget that works for you, the next step is building the system that keeps it working.
If you’re ready to build that system, the Budget Blueprints Workbook can walk you through the process step by step. It’s designed to help you move from “I need a budget” to having a clear, personalized plan for managing your money. Your budget is just the beginning; now build the system that comes next!
