How to Make a Budget in 5 Steps

By Sarah Li Cain · July 26, 2023 · 11 minute read

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How to Make a Budget in 5 Steps

Financial goals are meant to help you live your best life, whether that means helping you buy your dream home, affording your child’s education, or taking your mother on a cruise for her 60th birthday. To help you get there, it’s vital to have a budget that works for your situation and aspirations.

Having a budget can help you see where you are financially, know whether you’re on track for reaching your goals, and identify ways you can adjust your spending.

Once you have a budget nailed down — and the math is not as scary as some people think — you can reconfigure and adjust. After all, a budget is meant to work for you so you can reach your money goals, not the other way around. It can evolve right along with you, your needs, and your goals.

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.

money management guide for beginners

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 and how much is going out, plus what it is being spent on.

It 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 more than your means, 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 a budget doesn’t have to hold you back, restrict you from fun, or sour your lifestyle. It can eventually set you free from the financial burdens that are keeping you from setting and reaching your ultimate life goals.

Next, learn the step-by-steps.

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1. Determine Your Financial Goals

Setting financial goals is a crucial first step to being more intentional with your money management tactics. As in, having a purpose can give you more motivation to stick to your budget and get you 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 to you could be a financial goal example, including:

•  Having $1,000 in the bank

•  Hosting an amazing 30th birthday party for your partner

•  Buying a home

•  Starting a family

•  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 after-tax income — you can look at your paystub and/or other earnings from your side businesses or second job. Or maybe you are the lucky holder of an investment account that generates dividends. Perhaps you regularly receive bonuses or tips at work. Add it all up.

3. Review Your Expenses

To make a solid, workable budget, you also need to know exactly how much money is typically going out. Pull together all your financial statements and look at how much you typically spend per month in the following budget categories:

•  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

•  Healthcare

•  Savings/investments (for instance, 401(k) or IRA automatic savings deductions).

In addition, think about some other spending categories that are more about discretionary purchases. You can also track:

•  Dining out (even 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

•  Non-essential 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 records. For example, your credit card bill may vary considerably, so averaging a few months will give you a more realistic picture than checking a single month.

Once you have an idea of what you spend, it’s time to take a look at 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 since it can change. Don’t forget to look at occasional expenses — like semi-annual car insurance payments — so you can set aside money in your budget each month to account for this expense.

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.

While there are a bunch of budgeting methods, what’s most important is to find an organizing principle that works for your personal and financial style. 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 minimums due, 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 expenses that may not necessarily be considered essential.

•  20% toward your goals. This amount of money can go into savings and investments as you work toward things like an emergency fund, a new car, retirement, and/or your child’s college education.

💡 Recommended: Discretionary Income Explained

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The 70/20/10 Budget Rule

The 70/20/10 rule is another budgeting method. It’s similar to the 50/30/20 one but allocates more money toward your needs (70%) and less to the wants and savings areas. This budget can be a good variation for those who are just starting their careers or anyone who lives in an area with a high cost of living.

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 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 write the name and cash amount you have for each spending category for a month. For example, you allocate $2,000 for housing for one envelope, and $600 for food in another. You can only spend the allocated amount in each category.

If there is no more cash 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 use debit card payments. You don’t have to literally only use cash.

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: use these situations to learn and readjust.

You can also look for trends in your money. If you find you are living paycheck to paycheck, you might find ways to economize (such as getting a roommate) or to earn more money.

After using your new budget plan, you should 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. Still, it is typically useful to 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 see what may be happening and tweak your spending as necessary.

Another reason you may want to make adjustments is if your life situation changes, such as you have a baby or get a divorce. Or your income may have gone up, so you will need to think strategically about how best to allocate those dollars to help you reach your financial goals.

Monthly Budget Example

Here is an example of a family’s monthly budget:

Total monthly income: $4,650

Monthly breakdown of expenses:

Monthly income

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 & 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 unexpected 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. Meaning, you can allocate some extra cash each month just in case — any money that isn’t spent, you can roll it over onto the next month. It can act as a cash cushion in your checking account.

You can also consider building up an emergency fund, 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 to save three to six months’ worth of basic living expenses.

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 one needs, and how you can keep each other accountable. It 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 having an app where your partner or family can see an overview of the finances. Whatever you choose, it’s important to meet regularly to review your budget to see whether adjustments need to be made.

💡 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.

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 most is finding one that is a good fit for you personally and helps you feel in control of your cash. 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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What is money management and why is it important?

Money management involves making a plan to help you reach your financial goals, such as getting out of debt, saving for a vacation, or buying a new home. Without sound money management, it can be hard to understand your personal finances and reach your goals.

How do I prioritize my expenses?

You can prioritize your expenses by making sure you have an effective budget and sticking to it. You’ll likely want to prioritize basic living expenses and debt payments. Discretionary spending on the fun stuff of life (entertainment, eating out) can be an area to rein in, if needed.

What are some common mistakes people make with their money and how can I avoid them?

Some common mistakes people make with their money include not establishing clear financial goals, not building a budget that works, and not tracking their spending. To avoid them, it’s a wise move to find a budget technique that works for you, to regularly review and tweak your financial goals, and make adjustments when necessary.

What are some resources available for improving my financial literacy?

Your bank likely offers articles and tools to help improve your financial literacy. You can also head to government or reputable sources like the Consumer Financial Protection Bureau, or buy books or listen to podcasts by respected sources. You can also seek the help of a financial professional.

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