How to Make a Budget: 4 Steps

At the beginning of the pandemic, Americans were attuned to their personal finance and budgeting more than ever. But as 2021 continued, many Americans slowed their focus on growing their personal savings, according to the Bureau of Economic Analysis.

While the urgency to save as much as possible may have waned for some, the importance of budgeting remains. Creating a budget helps you reach your personal and financial goals, from saving for the future to reaching your next milestone, such as a new home, and helps you feel confident that your money is working hard for you.

These four budgeting tips make creating a budget easy, from choosing a savings goal to creating your budget to tracking your expenditures to finding a budgeting system that works for you.

Step 1: Determine your budgeting goals

Before you start setting your budget, reflect for a moment on why you’d like to make one. Outlining the underlying reason for budgeting, and what a personal budget will help you accomplish, will keep you motivated and on track with your goals.

Some individuals choose to budget to build their savings, creating a strong emergency fund and stowing away money for retirement. Others may wish to pay off debts once and for all — and even potentially minimize future debt — while still more may choose to budget to feel financially responsible.

Choose a goal that aligns with your long-term financial goals and helps you feel excited about budgeting. Consider writing down your goals to emphasize your commitment. Then move on to the next step: calculating your income.

Step 2: Calculate your total income

A budget tracks the flow of money into and out of your household, and determining your monthly income outlines how much you have coming in.

Individuals who earn a salary should examine how often they are paid — monthly, biweekly or weekly — and the amount of each paycheck to calculate their monthly income. Those without a fixed income, such as self-employed professionals or those paid hourly wages, should look back on their payment history — ideally, at least a year’s worth — to determine their average monthly income, as well as how much fluctuation can be expected.

Take note of any additional sources of income, such as from investments or rental properties. You can develop a plan for how to best use all your income — from employment, self-employment, investments or other sources — when you calculate your monthly expenses in step 3.

Step 3: Track your monthly spending

One of the benefits of budgeting includes gaining awareness of your spending habits, so create your budget by taking note of how your money is spent each month. Your expenditures fall into two budget categories, fixed and variable expenses.

Fixed vs. variable expenses

Together, fixed and variable expenses account for your monthly spending, but there are significant differences between the two:

Fixed expenses: Expenses that remain relatively constant each month
Variable expenses: Expenses that vary significantly from month or month, or year to year

Examples of Fixed Expenses	Examples of Variable Expenses
Mortgage or rental payments Property taxes Insurance (homeowner’s insurance, medical insurance, etc.) Internet and phone bills Childcare expenses Loan repayments Recurring subscriptions	Heating, water and other utility bills Home maintenance Groceries Dining and entertainment Travel Gas Vehicle maintenance Additional recreational spending

Begin tracking your spending by consolidating all of your expenses into one place, such as in a budget worksheet or a financial budgeting app. If you’re unsure how to track your spending, consider seeking out financial expertise from a professional. An advisor can walk you through the process of consolidating your expenses and help you design a budget plan that’s best suited to your unique needs.

Step 4: Create a customized budget plan

Budgeting isn’t a “one-size-fits-all” solution. Instead, of the variety of budgeting methods available, effective budgeters must find a system that works for their unique needs, goals and preferences.

Budget Plan	Best For…
50/30/20 Budgeting A budgeting method that allocates 50% of your budget to “needs,” 30% to “wants” and 20% to your financial goals	An approachable strategy for those newer to budgeting Divides expenses into three categories for simplicity Can be customized by adjusting the percentage of your income applied to each category
Zero-Based Budgeting A budgeting method that assigns every dollar a “job” until zero dollars are left over	May be ideal for those seeking a more detailed budget, or those who prefer to know how each dollar is allocated Allows budgeters to juggle multiple financial goals by building each one into the budget Helps you make strategic decisions about how to use your money most efficiently
Pay Yourself First Budgeting A budgeting method that begins by assigning money to savings goals, before addressing other expenses	May be ideal for budgeters who can cover their living expenses effectively, but seek to sneak more savings into their budget Puts savings front and center, allowing budgeters to pursue several savings goals at once

The right budgeting strategy for you may ultimately mix and match aspects of the budgeting methods described above, and it can also evolve along with your financial goals. Seeking assistance from a financial expert, such as an online broker or an advisor, can help you develop a personalized financial budget plan that suits your personal goals.

Now that you have a budgeting plan together, keeping budgeting tips handy could be beneficial to staying on track with your plan.

Other budgeting tips

Once the budgeting process is underway, many budgeters find that the most challenging element is staying consistent and adhering to the budget. As you develop your own budgeting method and strategy, consider the following budgeting tips to remain on track:

Be realistic: The best budget is the one you can stick to. A method that works for experienced budgeters, for instance, may prove overwhelming for those newer to budgeting. Take a realistic look at your preferences and strengths to find a method that works best.
Check before spending: Make budgeting part of your daily life, so you’re aware of how much money you have to spend before making a purchase. A glance at your budget may be all you need to stave off impulsive spending.
Adjust accordingly: Budgeting is an experience, and your budgeting method will grow along with you. Revisit and adjust your budget as needed — for example, if your financial situation has changed or you're struggling to stick to your goals — to make budgeting feel more manageable.

While it may take time to develop the most effective budgeting method, your efforts will pay off when you achieve your goals, save money and make each dollar work smarter for you.

The importance of maintaining a budget

Maintaining a budget forms the foundation of a sound financial plan. It serves as a road map that helps budgeters most efficiently manage their money, organize their spending and savings and work toward their longer-term financial goals.

While some of the benefits of budgeting, such as working toward greater financial security in retirement, may not be enjoyed for years down the line, others are more immediate. Budgeters often quickly notice they are able to feel more confident in their finances, and more easily meet their savings goals by curbing impulse spending.

As you begin to create your budget, remember that it should grow and develop as your goals do. Check in regularly to adjust and adapt your budget as needed, so your budget always works for you and facilitates achieving your goals.