How to Create a Budget in 5 Simple Steps

Money is spent quickly, especially in our current economy. You may start the month with the best of intentions about spending less or saving more, but unless you're working deliberately to stick to a reasonable budget, you're likely to wind up paying more than you planned to. 

That's why a shopping budget is so important. Americans only save 2.9% of their income, far below the recommended amount for future purchases and emergencies. A good budget will allow you to set and fund your priorities while leaving room for some fun and keeping your savings healthy as well. Budgeting helps you spend less, save more, and enjoy the peace of mind of feeling protected when emergencies arise. 

Key Insights

• Households are saving 1.5% less in 2024 than they were in 2023, reflecting higher spending and lower savings.
• 8 in 10 Americans are embracing digital financial and budgeting tools that can help track spending.
• Use budgeting to save money for emergencies before focusing on other goals, such as paying debt, traveling, or long-term saving. 

Step-by-Step Guide to Creating a Budget

Smart shopping starts with careful planning. A budget doesn't have to feel oppressive or limiting – it's an opportunity to be more intentional with your spending and saving. 

Assess your income and expenses

Creating a personal budget starts with understanding your current financial situation. Start by using your current financial resources, like your banking or credit card apps, to gather financial information. How much do you earn every month? How much do you spend? This is not a time to lie to yourself—be honest and dig to find every expense across all your various financial platforms. 

Be sure to use your net income, not your gross, especially if you are responsible for paying your own taxes from self-employment. Your gross income is how much you're paid before taxes and other paycheck deductions or expenses. When making your new budget, subtract your expenses, taxes, and retirement deductions from your gross income to determine your net income. Your net income is how much money you have left in each paycheck to spend.

Set realistic goals

Once you know where you stand financially, your next step is setting financial goals. What are you trying to do with your money? A wise consumer moves through several steps to set realistic budgeting goals:

1. Set up a simple budget. Consider using the 50/30/20 rule: 50% of your net take-home pay should cover needs, 30% covers wants, and 20% goes to savings.
2. Focus first on saving a small emergency fund. Set a goal of saving $1,000 to $2,000. Many budgeting experts suggest this amount would cover the cost of most emergency car or home repairs. 
3. Pay off debts. Once you can cover unexpected expenses, it's time to tackle any debt. A common method to attack debt is to pause your savings and use those funds to pay all minimum payments and extra on your smallest debt. When that debt is paid off, roll the amount you were paying to your next debt. Keep rolling your payments from one to the next until all debts are paid. 

It's important to be realistic in your goals. If you're currently living paycheck to paycheck, it's not realistic to try to travel, save for a new home, and pay off debt all at the same time by cutting back on streaming services and buying fewer groceries. Prioritize your goals. Save first to be sure any unexpected expense doesn't decimate your new budget immediately. 

Allocate funds for each category

Once you've done the big picture work of understanding your current situation and setting goals for your money, it's time to create the budget. Common consumer issues with budgets are not including all the relevant categories you need in your life or being too strict with yourself. 

Create the categories you need for your budget to work. These categories include: 

• Housing costs, including taxes and insurance
• Vehicle costs, including maintenance, gas, and insurance
• Credit card minimum payments
• Loan payments
• Groceries
• Utilities like gas, water, electricity, and cable or internet
• Cell phones
• Groceries and other food or household items
• Entertainment expenses like evenings out, streaming services, online game fees, etc. 
• Clothing, work expenses, and other incidentals
• Savings or debt payments. 

Once you've listed all your categories, divide your income into the necessary categories. Many of your expenses are "fixed" because you can't control how much you pay for monthly rent or your phone company charges you. Look at your "variable" expenses like streaming services, groceries, and entertainment to shave costs and move extra into your savings or debt payments. 

Track your spending

Once you've determined your budget categories, use financial apps or websites to help you track your spending. You can also track and categorize your spending using a notepad and calculator or download your expenses into Excel monthly. 

Source: create.microsoft.com

Working with a financial app can be easier since you can set up automatic data uploads, saving the hassle and time. They also allow you to check expenses for each category at any time.

Popular budgeting apps include YNAB, EveryDollar, Honeydue, and Goodbudget. Be mindful that you're working with a reputable app. Check for a scam alert or negative online reviews before sharing financial information with an app. 

Plan for unexpected expenses

One of the most important smart spending tips is to plan for the unexpected. The faster you save extra funds, the sooner you can navigate tough and stressful financial situations like vehicle repairs or travel emergencies like the one that trapped a family of three in Fort Lauderdale on their way to Costa Rica after a late flight. 

According to the review, the family had "several unexpected expenses, including rental car, lunch, dinner, and parking," and they had to "pay for a night in a different hotel." The airline responsible for the initial delay claims the company "cannot help," and the family was forced to pay out of pocket. Thankfully, they had the extra funds to cover the emergency expenses. 

Tips to Stick to Your Budget

Sticking to a new budget can be hard. Here are some budgeting tips to help you reach your goals. 

• Set up your banking to match your goals. Don't try to save funds in the same accounts you're spending from. Check a bank's rating and then open a new account just for saving.
• Plan shopping in advance. Use a list to keep you from making extra, unnecessary purchases. Plan your meals and shopping lists, and consider ordering online to avoid temptations in the store.
• Use comparison shopping. Before making big purchases, take the time to read reviews, check out online prices, and look for hidden fees or costs. Look for consumer insights in trustworthy reviews to learn whether a purchase is worth it.
• Use data, not "estimates". There are many financial tools to tell you exactly how much you've spent. When you guess, you will almost always underestimate how quickly those small expenses add up. 
• Review your budget regularly. Your income, expenses, and needs regularly change. You need to review your budget periodically to be sure it's accounting for your finances and meeting your needs. Ultimately, if you're unsatisfied with your budget or it's too restrictive, you won't stick with it. Make a budget that's realistic and works for you. 

Spend Your Money Wisely

Budgeting is a healthy way to make your money work for you. Knowing that you control your funds brings you peace of mind and lets you be more intentional about your purchases. Spend your money wisely by budgeting and choosing companies to work with who value you as a consumer. Have a great experience with a company others should consider? Why not write a review?