Last updated on October 31st, 2019
If you need to know how to create a budget but you don’t know how to get started, this simple step by step tutorial will make it easy.
Some people make budgeting out to be way more complicated than it needs to be.
They expect you to have a degree in rocket science before you can balance your checkbook.
But what you need is simple solutions. You need step by step instructions on how to create a budget that will actually work.
And you need it to be easy enough to follow without spending hours entering information into some complicated software.
The budgeting method I’m about to share with you is so simple you’ll only need a pen and some paper (and maybe a calculator).
This really is the easiest way to budget ever.
So let’s get started!
How To Create A Budget In Six Easy Steps
Remember to follow all of the steps below. If you skip any of them you’ll be much less likely to succeed.
Step 1: Calculate your monthly income
The first step in managing your money is knowing how much you have to work with. Grab a piece of paper and write down your income like this:
If you receive a regular paycheck for the same amount this step is pretty easy. If you have inconsistent income (maybe you make lots of overtime or you have your own business selling on Etsy) you should put down the minimum you earn each month.
For example, if you earn somewhere between $1,200 and $2,000 each month, you want to put down $1,200.
This is important because you need to budget so you can survive the tougher months. When you have an above average month, it just means you’ll have extra money to play with…and that’s a good thing!
Step 2: Add Up All Your Expenses
This step can be pretty eye-opening so I hope you’re ready for it.
On the same piece of paper as above, write down all of your monthly expenses. Leave nothing out, big or small.
Typically expenses fall into two categories: fixed and variable.
Fixed expenses are the bills that are pretty much the same each month. Examples of fixed expenses include your mortgage, car payment, cell phone bill, and student loans.
It is possible to reduce these types of bills, but that will usually require some work and strategic thinking.
Variable expenses are easier to trim because they are less consistent and are determined by your day to day choices. Your variable expenses include food, entertainment, clothing, and travel.
Step 3: Set Some Goals You Can Strive For
In addition to the monthly bills you need to pay, you also want your budget to include some goals you want to reach. Remember the importance of paying yourself first!
Your goals may vary depending on your current situation.
If you’re up to your eyeballs in debt you might want to extend your outlays on debt payments. You could also increase your retirement savings, invest in dividend paying stocks, or save up for a new car or vacation.
The choice is yours but be sure you don’t shortchange yourself here. Where’s the fun in spending all your money on bills and not enjoying life at all?
Now your budget should look something like this:
Step 4: Make Adjustments As Needed
Now that you have your income, expenses, and saving goals listed it’s time to add everything up.
Total up all of your monthly expenses and goals and then subtract them from your monthly income.
If you are left with a positive number, that’s great! That means you have extra money to play with and you can put even more towards paying down debt or investing for your future.
If your expenses are actually greater than your income, you are in trouble and it’s time for immediate action.
Here are some steps up can take right now to get your expenses in line. I suggest doing these even if you already are in a stable financial situation.
Trim Unneeded Expenses
We all pay for things that we don’t really need and hopefully you’ve already identified a few of those just by listing out your monthly bills.
Do you go out to eat more than you can afford? Still paying for the gym membership you haven’t used in over a year? Can you scale back on your cable TV package or ditch it altogether?
Make Sure Your Tax Withholding Makes Sense
No one wants to end up owing money come tax time. But getting a big tax refund isn’t a great idea either.
Think about it. If you get a refund of $2,400 that means you overpaid and were giving the government an interest free loan.
You also hurt your budget because you could have had an additional $200 per month to work with.
If you need to adjust your tax withholding to have less money withheld from your pay check, all you have to do is file a new W4 form with your employer.
Call each of your credit card lenders and ask them to lower your rate. You might have to speak to a supervisor and if you have missed payments they might not be too agreeable, but if they can drop your interest rate even a couple of points you’ll save money.
You can contact other creditors and vendors as well to negotiate as well.
Look for things that are less expensive than what you’re using right now and make the switch.
Here are some quick examples:
- Ditch your expensive cell phone contract for a pay as you go plan.
- Cancel your cable plan and switch to Hulu or Netflix.
- Use your local library instead of constantly buying new books and movies.
- Skip expensive name brand products and go with generic (which are just as good) instead.
I’m sure if you look at your spending you’ll find several areas where you can substitute something for a less expensive option and barely notice the difference at all.
Step 5: Increase income
Of course, cutting your expenses will only get you so far. That’s why I recommend you also look to bring more money into your household.
Here are just a few ways you can increase your income:
If you job allows it, overtime is an easy way to paid your paycheck.
Get a part time job. When we first started having kids, Mike got a part-time job at Babies R’Us. Not only did he bring home extra money, but we got to take advantage of his employee discount on all the baby stuff we needed.
Side hustles. In our house we are all about the side hustles. There are so many options to choose from. You can complete paid surveys online, become a mystery shopper, write articles as a freelancers, start your own blog, sell crafts on Etsy, do odd jobs, etc.
Step 6: Track Your Progress And Update Regularly
Most of the hard work in creating a budget is at the beginning, but you can’t just run the numbers and forget all about it.
It’s important to track your spending and make sure that all of your bills are paid on time (late fees are a no-no).
You can do that with a simple notebook or a basic spreadsheet using Excel or Google Sheets. Or if you want more features and less work for yourself, you can use budgeting software like Mint or Personal Capital.
When you get a raise at work, go ahead and update your income. When you pay off one of your credit cards, just take that extra money and reallocate it to something else.
That’s it! Now you know how to create a budget that will work for you!
If you follow these simple steps you’ll be able to take control of your money and reach all of your financial goals.
Mike Collins has been working in the financial industry since 2002 and is a self-proclaimed money nerd. He’s written for numerous personal finance websites and been featured on sites such as MarketWatch, Fortune, and Business Insider. Mike created Wealthy Turtle to give readers the tools and knowledge to manage their money like a rock star.