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Making a budget can be the foundation for taking control of your money and reaching your financial goals. It can help you stay on top of the cash you have coming in, your spending, and your savings. Put simply, a budget can get your financial life in balance.
The math involved doesn’t have to be complicated, and a good budget can be easily revised to align with changes in your life, whether that’s a rent increase or a raise at work. Read on for the five simple steps to creating a budget that can help you become more financial savvy and make your money work harder for you:
Key Points
• Establishing clear financial goals serves as the foundation for effective budgeting and motivates people to manage their money intentionally.
• Calculating total income accurately is essential for understanding the financial resources available for budgeting purposes.
• Reviewing monthly expenses helps identify spending patterns and distinguishes between needs and wants, enabling better financial decisions.
• Selecting an appropriate budgeting method, such as the 50/30/20 rule, helps allocate funds efficiently towards essentials, discretionary spending, and savings.
• Regularly adjusting the budget in response to life changes or unexpected expenses ensures it remains effective and aligned with financial goals.
5 Steps to Creating a Budget
1. Determine Your Financial Goals
4. Choose Your Budgeting Method
1. Determine Your Financial Goals
Setting financial goals is a crucial first step to being more intentional with your money management tactics. This means that having a purpose can give you more motivation to stick to your budget and be on your way to creating smart financial goals that suit your life.
How to set financial goals? Start by taking time to come up with a clear idea of your short-term and longer-term aspirations. What kind of things could you dream about? Anything that’s ultimately important counts.
Examples of financial goals could include:
• Having $1,000 in the bank
• Hosting an amazing 30th birthday party for your partner
• Buying a home
• Saving enough to cover your kid’s college tuition
• Getting some new wheels
• Taking a dream vacation
• Getting out of credit card debt
• Starting your own business
• Planning for retirement
• Establishing and maintaining an emergency fund.
2. Calculate Your Income
Before allocating money for various spending categories and goals, you need to know how much money you have to work with each month. Calculate your income — you can look at your paystub and/or other earnings from any side businesses or a second job. Or maybe you’re the lucky holder of an investment account that generates dividends. Perhaps you regularly receive bonuses or tips at work. Add it all up.
Check out our Money Management Guide.
This article is from SoFi’s guide on how to manage your money, where you can learn basic money management tips and strategies.
3. Review Your Expenses
To make a solid, workable budget, you also need to know exactly how much money is going out. Collect all your financial statements and look at how much you typically spend per month for different categories.
Budget categories can include:
• Loans (such as student or car loan payments) and debt (including credit cards)
• Insurance premiums
• Housing
• Utilities
• Monthly food expenses
• Childcare, child support, or related family obligations
• Transportation-related expenses
• Health care
• Savings/investments (for instance, 401(k) or individual retirement account [IRA] automatic savings deductions)
In addition, think about some other spending categories that are more discretionary purchases. This is about identifying wants vs. needs. For instance, in terms of wants, you can also track discretionary spending:
• Dining out (including those lattes to go)
• Entertainment, such as movies, books, concert tickets, and streaming services
• Personal care (manicures, yoga classes, etc.)
• Travel
• Gifts or treating friends to birthday drinks or dinners
• Nonessential clothing, electronics, home furnishings, and any other fun things you might go shopping for
As you gather this information, you may want to look at a couple of months’ worth of financial records. For example, your credit card bill may vary considerably, so averaging a few months will give you a more realistic picture than just checking a single month.
Once you have an idea of what you spend, it’s time to evaluate where you may be able to make adjustments.
• Many people look at their spending as “needs” versus “wants.” A need is something required for basic existence, while a want is discretionary spending. Needs also include debt payment, so if you have a student loan or similar monthly expenses, include that in the need category.
• Also, consider looking at each spending category in terms of fixed and variable expenses. For instance, your mortgage is a fixed expense since it typically won’t change from month to month, whereas entertainment would be a variable expense because it can change. Don’t forget to look at occasional expenses, such as semi-annual car insurance payments, so you can set aside money in your budget each month to account for this expense.
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4. Choose Your Budgeting Method
Subtract your monthly expenses from your monthly income. How are you doing? If there’s money left over, it means you may be able to meet your financial goals. Otherwise, you may need to either cut your expenses a bit or earn more money (or try a combination of both).
Whichever direction your money is trending in, you can benefit from a budget to get your cash aligned with your goals and provide guardrails for your spending and saving.
Although there are a bunch of budgeting methods, what’s most important is to find an organizing principle that works for your personal and financial lifestyle. Here are some options to consider:
The 50/30/20 Budget Rule
The 50/30/20 budget rule breaks up your budget using the following percentages:
• 50% on essential expenses: This category could include housing costs, utilities, car payments, debt payments (student loans, credit card minimum dues, etc.), education costs, food, basic clothing, childcare, and medical expenses.
• 30% on discretionary expenses: Your discretionary expenses could include shopping, entertainment, personal care, travel, and other costs that may not necessarily be considered essential.
• 20% toward your goals: This money can go to savings and investments as you work toward things such as an emergency fund, a new car, retirement, and/or covering your child’s college education expenses.
Recommended: Check out the 50/30/20 rule calculator to see a breakdown of your money.
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The 70/20/10 Budget Rule
The 70/20/10 rule is another type of budgeting method. It’s similar to the 50/30/20 one, but you organize your money differently. In this case, you divide it up as follows:
• 70% toward spending on both needs and wants
• 20% toward saving
• 10% toward debt payoff and/or donations
This budget can be a good variation for people who want to be sure they are covered for that debt payoff and/or giving category.
Zero-Based Budget
The zero-based budget system gives every single dollar a purpose so that every bit of your income is accounted for. You start with your monthly income and then keep subtracting expenses (even savings or a sinking fund counts here) until you get to zero. This system can help you be more mindful since you know how your money is allocated.
The Envelope Budget System
With this technique, you make note of the name and cash amount you have for each spending category for a month. For example, you allocate $2,000 for housing in one envelope and $600 for food in another envelope. You can only spend the allocated amount in each category.
If there is no more cash left in the envelope but the month isn’t over yet, you will need to wait until the next month to replenish it or borrow from another category and spend less there. For instance, if you need cash for an insurance premium that went up, you could save on streaming services by dropping a platform or two while you adjust your budget.
This method can be adapted to using debit card payments. You don’t have to literally put cash in envelopes.
5. Make Adjustments
A budget is a dynamic, living entity. Some months may be more expensive than others. For instance, you might have an emergency one month (your laptop dies) and wind up spending more (or even going into debt) to make ends meet. Life happens, so use these situations to learn and readjust.
You can also look for trends in your money habits. If you find yourself living paycheck to paycheck, you might look for ways to economize (such as getting a roommate) or earn more money.
After creating your new budget plan, review and update it regularly. You may need to do it more often at the beginning of your budgeting journey when you’re getting used to looking at your finances in a new light. At a minimum, review your spending at the end of each month to see if your budget is still working for you. If not, then take the time to assess what’s happening and tweak your spending as necessary.
Another reason you may want to make adjustments is if your life situation changes, such as having a baby or getting a divorce. Or maybe your income has gone up, so you will need to think strategically about how best to allocate those available dollars to help you reach your financial goals.
Why Is Creating a Budget Important?
Creating a budget is important because it allows you to see where your finances stand. You see how much money is coming in and how much is going out, plus what it’s being spent on.
A budget can provide you with a snapshot of your financial life, and it can illuminate any issues you need to address. Think about it — if you don’t know where your money is going, you can easily spend beyond your means, potentially leading to more debt than you can handle. Not budgeting can also prevent you from reaching your goals, such as having enough in retirement savings or being able to afford that kitchen renovation you’re pining for.
Although some people think a budget will cramp their style, the truth is that it doesn’t have to hold you back, restrict you from having fun, or sour your lifestyle. It may eventually set you free from the financial burdens that are keeping you from setting and reaching your ultimate life goals.
Monthly Budget Example
Here is an example of what a family’s monthly budget may look like.
Total monthly income: $4,650
Monthly breakdown of expenses:
| Monthly income | $4,650 |
| Monthly expenses | |
| Rent | $2,000 |
| Groceries | $400 |
| Student loan payments | $337.50 |
| Car payment | $150 |
| Credit card payment | $300 |
| Discretionary spending | $232.50 |
| Utilities | $330 |
| Auto and renters insurance | $150 |
| Career enrichment class | $60 |
| Savings | $400 |
| TOTAL: | $4,360 ($290 surplus) |
How to Handle Unexpected Expenses in Your Budget
You know how it goes. Life can be filled with surprise expenses, such as a car repair or larger-than-expected medical bills. Instead of letting these derail you, work unexpected expenses into your budget.
There are several ways you can go about it, one of which is to have a bit of a buffer in your account. This means putting aside some extra cash each month just in case, and any money that isn’t spent can be rolled over to the next month. It can act as a cash cushion in your checking account.
You can also consider building up an emergency fund, which is a separate set of savings in case you have unexpected expenses. The amount will vary, but a good rule of thumb for how much to have in an emergency fund is at least a few months’ worth of basic living expenses.
💡 Quick Tip: An emergency fund or rainy day fund is an important financial safety net. Aim to have at least three to six months’ worth of basic living expenses saved in case you get a major unexpected bill or lose income.
How to Work With Your Family or Partner to Create a Budget
Creating a budget with others means being open to a conversation about what each of you needs and how you can keep each other accountable. You can start by having a meeting about family spending. You can discuss and agree to budget goals and reasonable expenses and use a budget planner to help you solidify things.
Once a preliminary budget is created, find a way to ensure that everyone sticks to it. Some tactics include having one joint account to ensure everyone can track spending or using an app in which your partner or family can get an overview of the finances. Whatever you choose, it’s important to meet regularly to review your budget and see whether adjustments need to be made.
The Takeaway
Creating a budget to set and reach your financial goals doesn’t have to be hard, and it can be a great way to guide your spending and saving. While there are many approaches and techniques to try, what matters is finding one that is a good fit for you personally and helps you feel in control of your money. By learning how to manage your money well, you can be on track to crush your personal and financial goals, whether short- or long-term.
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FAQ
Why is creating a monthly budget important?
Creating a budget is important because it allows you to see where your finances stand. You can evaluate how much money is coming in and how much is going out, plus what it’s being spent on. It can also help highlight any issues you need to address.
What are some common budgeting mistakes to avoid?
Common budgeting mistakes include not tracking your spending, not saving enough (say, for an emergency fund or retirement), and forgetting to plan for occasional expenses, such as membership renewals, car maintenance, and holiday gift giving.
How often should I review and update my budget?
It’s wise to review and update your budget regularly. Some people may want to do so monthly, while others only quarterly, depending on their needs. It’s also a good idea to revisit your budget after big life events, such as moving, getting married, or having a child.
How can I involve my family or partner in creating and sticking to a budget?
To involve others in creating and sticking to a budget, you might first meet and develop the plan together. Then, you could share accounts and use an app so that everyone involved can see where the money is going. This can help you all stay on track.
How can I handle unexpected expenses in my budget?
You can allocate a bit of money in your budget to be “just in case” funds. This cash cushion or buffer can be used if there’s an unexpected expense. If you have a major unplanned expense, then you might have to dip into some emergency savings — that’s why it’s crucial to have this kind of safety net.
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