7 Simple Steps to Creating a Budget That Works

Once you’ve gotten yourself into a financial mess, it can be tough to see a way out. You probably know that you need a budget, but you might not know how to get started. So what are the 7 steps in creating a budget?

  1. Put the combined household net monthly income at the top
  2. List all monthly expenses below that
  3. Have categories for rent/mortgage, automobile gas, personal spending money, utilities, etc.
  4. Have a plan for irregular or quarterly bills and expenses (oil changes, etc.)
  5. Make sure the expenses are lower than the income
  6. If debt-free, ideally set aside 15% of the net income for 401k/retirement
  7. Have the budget hit a 0 balance at the bottom

But don’t worry. I’ll break down each of those in great detail below.

Budgeting can not only help you set money aside for savings; it can also help you get out of debt. Tracking your spending is a good place to get started.

So, that’s not all there is to know about getting out of a financial mess. In this article, we’ll dive deep into how to create and stick to a monthly budget. We’ll also talk about how getting started on your first budget can help you pay off those debts and build wealth.

Just keep reading!

So what are the 7 Steps to Creating a Budget?

1. Put the combined household net monthly income at the top

Start by figuring out how much money you bring in on a monthly basis. This will include all of your regular income. But it will also include money you make from side jobs, rental property, or any other hobby money that comes in.

2. List all monthly expenses below that (rent/mortgage, utilities, internet, phones, etc.)

Next, list out all of your monthly expenses.

You’ll have categories for rent or mortgage payments, utilities, internet, cell phones, and car payments. Include any expenses you pay on a monthly basis. If you have any expenses that vary in cost, budget towards the high end.

This way, you can make sure you have enough money to meet your bills. Anything leftover can go towards savings.

Not sure exactly what all your expenses are? Just go to your bank’s website and pull up the last few bank statements and scan for where your money has been going. Then just make note of all the things that are normal.

3. Also have categories for:

  • Vehicle gas
  • Personal spending money
  • Groceries
  • Eating out
  • Kids’ allowance
  • Monthly saving for Christmas expenses

Next, have line items for other necessities.

Set aside money for gas, groceries, entertainment, and personal spending money. Also, set aside money each month for Christmas, birthdays, and allowance.

I typically spend $2,000 each Christmas between food, travel, and presents.

And if I didn’t save up all year, I’d most likely have to put that on a credit card. Instead, I just set aside $181 each month from Jan to Nov.

Many banks will allow you to have multiple savings accounts. You can even have your check directly deposited and set up your bank to have money deposited into your savings automatically.

This way, you don’t even have to think about putting money away. And you don’t have to mix your holiday and gift savings with your emergency fund.

A good way for couples to stay on the same page when it comes to budgeting is to share a budget app.

There are budgeting apps that do everything from tracking spending, savings, and investing. And there are apps out there that just focus on budgeting.

Having a budgeting app also helps both partners keep tabs on one another’s spending.

To figure out what the best budgeting app is for your household, check out this recent article. I get into the 9 best ones, most of which are totally free.

Just click the link to read it on my site.

4. For irregular, quarterly, or variable expenses, budget a portion of that expense (and transfer to savings)

For irregular or quarterly expenses like car insurance or taxes, budget a portion of that expense every month. Transfer that money into a savings account and don’t touch it until it’s time to pay the bill.

You can do this with annual expenses, too.

Quarterly and annual expenses can creep up on you if you aren’t prepared for them. By putting money away now, they won’t hurt you when they come around. It may feel like you’re putting away “extra” money, and you may be tempted to spend it now. But you’ll be grateful you had it squirreled away when that big tax bill comes.

For example, I pay for my trash and recycling curbside pick up every 3 months.

It’s $137 each time the bill comes. So I just divide that by 3 ($45.67), and then I budget that each month and transfer it to a short-term savings account. Then when the bill comes, I just transfer it back to my checking account where I pay my bills from.

But it’s also a great idea to have an emergency fund for unexpected expenses.

5. Make sure the expenses are less than the income (and adjust discretionary spending as needed)

Probably one of the most important things about budgeting is that you stick to it. If you spend more money than you make, you will always be in debt. Your expenses should be less than the income you bring in.

Cut out all unnecessary expenses until you get there. 

Once you get to a place where your expenses are less than your income, and you have spending limits, you can add in some discretionary spending. Then, adjust it as necessary. But make sure to set aside some money for savings before you set aside money to spend.

One way to make sure you and your spouse are on the same financial page is to share a bank account. Budgeting isn’t just about money. It’s also about coming together and being completely honest and transparent with one another.

To read more about whether couples should share a bank account and the benefits, check out this recent article.

It’s a proven fact that money fights and money problems (one of the top reasons for divorce) happen less when everything is combined. But there is 1 vital exception to that.

Just click the link to read it on my site.

6. If debt-free, ideally set aside 15% of the net income for 401k/retirement (and, if there are school-age kids, ideally put money each month into 529 college savings accounts)

Use your budget to pay down any debts.

Once your debts are paid off (aside from your primary mortgage if you own your home) don’t just start spending money freely. Instead, put the money that was going to pay off debts to pay yourself. Now is the time to start putting money away towards retirement.

If you have kids, put money away for their future college expenses. Ideally, this would go into a 529 college savings account.

A 529 plan is an investment account that offers tax benefits when used to pay for college tuition, apprenticeship programs, or repay student loans.

Think about it like a Roth IRA plan for education. 

You put your after-tax contributions into an investment account. It grows tax-deferred and can be used tax-free when used for qualified educational expenses.

7. As much as possible, get the budget down to 0 at the end of the month or add any excess to retirement accounts

Follow the budget all month, and you shouldn’t have any money left over.

If you do have any money left over to spend, put it away in savings. You can start saving for the next Christmas, put it in your emergency fund, or add it to retirement accounts.

You could even add it to your discretionary spending if you want. Having a budget doesn’t mean that you don’t ever buy things you want. It just means that you buy things more carefully.

A personal budget helps you live within your means. It doesn’t mean you don’t enjoy things.

If you consistently have money left over at the end of the month, add a line item to your budget for donations. Donate some money to your favorite charity.

Donating money not only feels good but it can be written off on your taxes, too.

Frequently Asked Questions

Why is a household budget important?

Budgeting helps plan for long-term and short-term goals, allows individuals and couples to see where every dollar is going, and ensures the expenses are lower than the income. In short, it allows individuals and couples to determine in advance where the money goes rather than finding out after it has been spent.

After all, only Congress gets to spend more money than they have. The rest of us have to live in the real world.

If you’ve already gone into debt, budgeting can help you get out of it. But budgeting doesn’t just help get you out of debt. It can keep you from getting there in the first place.

Creating a budget can help you understand where your money is going every month. It can help you develop a plan for saving. You can track your spending and saving so you can reach your financial goals.

In order to create a household budget, you both need to be on the same page. 

If you’re already headed toward financial trouble, don’t blame or hurl accusations. You must be in communication and agreement. Make a budget, discuss expenses, and check in with one another until budgeting becomes a habit.

There is a lot to know about budgeting, finances, and getting your spouse on the same financial page.

Just check out this recent article to learn more about why you need a budget and how to get your spouse to stick to one. After all, usually, 1 spouse is more dedicated to budgeting than the other. And if your spouse isn’t on the same page, you may never get ahead.

Just click the link to read it on my site.

How does budgeting help you save money?

As a general rule, budgeting helps us live within our means, better evaluate spending decisions, and ensure we spend less than we make. It’s about having a plan and making intentional decisions rather than simply hoping for the best or giving into impulses without being fully aware of the financial impact.

Budgeting helps you keep your eye on the prize.

If you want to retire early, take a European adventure, or buy a new home, budgeting can help you get there. It helps you see exactly how much money you have coming in and how much money you have going out.

When you create your budget, you set aside money specifically to put away in savings. 

Your budget should include an emergency fund that will cover at least three to six months’ worth of living expenses.

Unexpected things happen. You or your child can get sick or injured. You could have a death in the family or get laid off. All of these things can get you into a world of debt if you’re not prepared.

By setting aside money to go into an emergency fund will ensure that you don’t go into debt because of a financial burden.

It can also help you set money aside for retirement. If you’re not already putting money into a retirement fund, set aside a portion of your earnings to help build a nest egg.

If you’re just starting out, start small. Start by putting $10-$15 per paycheck into savings and retirement. It’s not much, but if you’re consistent, you’ll watch your savings grow over time.

You may be wondering if $10-$15 will even make a difference.

It can be tempting to spend that money on coffee or eating out, or any number of unnecessary things. But if you keep your eye on the prize, and have a spending plan, you’ll make sure that money goes where it should go.

Yes, it is going to take discipline, but it will all be worth it in the end when you’re retiring while your friends are still working.

How can budgeting keep you out of debt?

Budgeting helps shed light on bad spending habits, and when done properly, ensures that the spending is lower than the income, which prevents unnecessary credit card spending or the need for personal loans.

Keeping tabs on what you spend and where you spend it will show you precisely what you’re spending your money on. You’d be surprised at how much money people spend on things they don’t really need.

Five dollars on coffee, $10 for lunch, the drive-through on the way home from work.

All of these small expenditures can add up. It’s really easy to spend money without realizing how much you’re spending. And before you know it, your credit card statements are enormous!

Keeping track of these little expenses and making sure they don’t get out of control is vital.

Tracking your bills and daily spending for a month is a good way to get started. It can be difficult to know where to cut spending, but keeping track for a month can help you see what can be cut.

Once you’ve determined where you can cut out some spending, create a budget. 

Since you know that you are spending $25 a week on coffee, give yourself $10 a week to spend, and make coffee at home the rest of the time. If you’re spending $50 a week on lunch, brown bag it instead.

Forego the drive-through on the way home from work and save even more money.

The money you are no longer spending on these things can go towards paying down debt or can go towards your emergency savings, retirement, or kid’s college funds (or all of those).


How to Manage Money As a Couple - Vlogmas #18

Final thoughts

Creating a budget can be intimidating, especially if you are already in debt. But it doesn’t have to be overwhelming. You can use an app, a spreadsheet, or just a simple notebook. It doesn’t have to be complicated.

Start by writing out the net household income and listing monthly expenses.

Then, set aside money for daily spending. Any money left over at the end of the month should go toward your retirement fund or your emergency fund.

Budgeting is not exciting, but it is necessary.

It can get you out of debt, and it can keep you from going into debt in the first place. It ensures that you don’t spend money you don’t have and you have money to spend on the things you want.

Image by Tumisu from Pixabay

While I have years of successful financial & budgeting experience and run several million-dollar businesses and handled the accounting, P&L and been responsible for the financial assets of them, I am not an accountant or CPA. Like all my posts, my posts are opinions based on experience, observations, research, and mistakes. While I believe all my personal finance posts to be thorough, accurate, and well-researched, if you need financial advice, you should seek out a qualified professional in your area.

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