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How to Create a Budget in 6 Steps

October 19, 2022 · 7 minute read

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How to Create a Budget in 6 Steps

Budgets sometimes have a bit of a bad reputation; they’re seen as being a killjoy. But in truth, a budget doesn’t have to hold you back, restrict you from fun, or sour your lifestyle. In fact, it can eventually set you free from the financial burdens that are keeping you from reaching your ultimate life goals.

A budget can help put your financial house in order and make you more efficient. In the end, your budget could be your strongest and most faithful economic ally. It allows you to see how your spending and saving tracks against the income you bring in each month. Once you have this equation nailed down — and the math is not as scary as it sounds — you can reconfigure and adjust.

You’ll likely find that a budget allows you to control your finances rather than have your finances controlling you. So read on to learn the six steps needed to create a budget and see an example of how a budget can stack up.

6 Steps to Creating a Budget

Here, you’ll learn the six steps that will help you create a budget. You will need to take a look at what you earn and what you spend, as well as do a little basic math. The results will be a guideline that shows you what you are spending, how much you should be spending, and how much you can allocate to your important financial goals, whether that means going to Japan to see cherry blossoms next spring or knowing that you’ll have the down payment for a house saved up within a couple of years.

1. Aligning Your Goals

Before starting a budget, it can be helpful to have a clear idea of your short-term financial goals and longer-term ones and to keep them in mind throughout the entire process. Goals could be anything that’s ultimately important to you:

•   buying a home

•   starting a family

•   travel plans

•   getting out of credit card debt

•   planning for retirement

•   starting and maintaining an emergency fund.

Of course, these are just suggestions, but they can guide your budget and help you prioritize how you allocate your money.

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2. Gathering Your Financial Docs

To make a solid, workable budget, you need to know exactly how much money is coming in and how much money is typically going out. You are going to want to know both how much money is coming in and how much is going out.

First, pull together how much you have coming from all sources of income. Then, it’s time to dig into your expenses. You may think of organizing your bills as grunt work, but it’s actually a great way to get a crystal clear picture of what you are spending each month. These will become the basic building blocks of your budget.

Take a look at how much you typically spend per month in the following categories:

•   Credit cards and credit card debt

•   School loans

•   Car loans and expenses

•   Insurance premiums (health, life, car, home)

•   Rent/mortgage

•   Utilities

•   Monthly food expenses

•   Child care, child support, or related family obligations

•   Transportation (other than car)

•   Savings/investments (401(k), IRA, automatic savings deductions)

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.

3. Calculate Your Income

Now that you have the forms you need in front of you, add up how much you have to work with each month. In all cases, what you want to work with is your after-tax, not pre-tax, income.

Perhaps this step just involves looking at your paystub, or perhaps you also have a side hustle or rental property that brings in money. 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.

4. Review Your Spending Categories

Next, take all that expenses-related info from step #2 and group your spending into categories. 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.

Be a bit strict with yourself about what you truly require to exist and what is a luxury. So your weekly grocery bill is a need, but that twice-a-week takeout sushi habit is a want. A new pair of shoes because your old ones wore out may be a need, but a cool pair of boots that are on sale goes into the want category.

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5. Building Your Budget

First, get a big-picture view of your finances, which is a critical step in building your budget: Subtract your monthly expenses from your monthly income. How are you doing? Is there money leftover? If so, that can be applied to meet your financial goals.

Are you breaking even or veering into negative territory? That means you need to either cut your expenses a bit or earn more money (or try a combination of both).

Then, you want to get more detailed, and establish your budget, which will give your guidelines and guardrails for your spending. What’s most important is to find an organizing principle that works for your personal and financial style. Here are a few ideas; you might try one for a couple of months and see if it’s a good fit.

•   The 50/30/20 Budget Rule. The 50/30/20 budget breaks up your budget like this:

◦   50% on essential expenses. This category could include housing costs, bills and utilities, auto payments, insurance and repairs, education costs, food, essential services (like childcare) and medical costs.

◦   30% on discretionary expenses. You probably still want to live and enjoy life, but live it with a strategy and end goal in mind. Your discretionary expenses could include shopping, entertainment, personal care (like haircuts and gym), travel, and other expenses that may not necessarily be considered essential.

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

•   The 70/20/10 Budget Rule. This is similar to the 50/30/20 rule, but allocates more money towards needs. This 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. In this system, every single dollar is given a purpose until you get to zero (or every bit of your income accounted for). When you know how your money is allocated, it can help you keep on track and not mindlessly spend. For instance, your budget may allocate $100 a month to dining out. If you know it’s the 20th of a given month and you’ve already spent that amount, you’re better able to realize that going out for brunch will throw your budget out of whack.

•   The Envelope Budget System. In this method, you write the name and cash amount you have for a category for a month. So you might put, “Housing, $2,000” on one envelope, “Food, $600” on another, and so forth. As you spend in each category during the month, subtract your expenses from the amount on the envelope. When you hit zero in a category, stop spending for the rest of the month.

There are many other budget methods available via apps and online. Check if your bank offers budgeting tools; many do. And if you like to manage your budget with an Excel spreadsheet, with a pad and pencil, or other means, that’s fine. Whatever can help you keep track of your money and manage your spending and saving will be good.

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6. Making Adjustments

A budget is a dynamic, not static, thing. Some months may be more expensive than others (say, around the holidays, when you are buying gifts). Other times, you may notice a pattern that you are struggling to make ends meet and building up credit card debt. In those cases, you’ll need to find ways to minimize your expenses so you can recalibrate. Don’t beat yourself up; just use this learning to move forward in a positive direction.

In terms of cutting your spending, you might take a closer look at any expenses that you can honestly call non-essential, and be brutally honest with yourself. Even if you start slow and be kind, you can take off a few bucks here and there, and then maybe work your way up to the bigger expenses.

For instance, you could start with eliminating, or at least reducing, your mani/pedi appointments, or your daily espressos. Little steps. The money you save on non-essential spending can be placed instead toward lowering your credit card debt or boosting retirement savings plan.

There’s also the other possibility: Your income might rise. You might get a raise and need to think strategically about how best to allocate those dollars to avoid “lifestyle creep,” when your spending rises along with your earning power but you don’t wind up building wealth.

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Example of a Monthly Budget

Here’s a look at what a monthly budget might look like. Remember, this example is based on after-tax, not pre-tax, income.

Monthly Income

Salary $4,000
Side hustle (average) $150
Total: $4,650
Monthly Expenses
Rent ($1,500)
Groceries ($375)
Student loan ($337.50)
Car payment ($300)
Credit card payment ($300)
Discretionary spending (eating out, etc.) ($232.50)
Power, cable, internet ($330)
Auto & renters insurance ($150)
Career enrichment class ($60)
Savings ($400)
Total: ($3,985)
Budget Totals
Income $4,650
Expenses ($3,985)
Budget surplus or deficit $665

As you see in this example, the budget has $665 excess cash at the end of the month, which could be used to pay down debt more quickly or put towards savings goals, whether short- or long-term.

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The Takeaway

Creating a budget doesn’t have to be hard, and it can be a great way to guide your spending and saving so you can realize your financial goals. 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.

One way to help stay on top of your budget is by tracking your spending. With an online bank account with SoFi, you’ll have great tools to help you track your weekly spending and notice patterns. What’s more, when you open our Checking and Savings account with direct deposit, you’ll earn a super competitive APY and pay no fees, both of which can help your money grow faster.

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3 Great Benefits of Direct Deposit

1. It’s Faster
As opposed to a physical check that can take time to clear, you don’t have to wait days to access a direct deposit. Usually, you can use the money the day it is sent. What’s more, you don’t have to remember to go to the bank or use your app to deposit your check.

2. It’s Like Clockwork
Whether your check comes the first Wednesday of the month or every other Friday, if you sign up for direct deposit, you know when the money will hit your account. This is especially helpful for scheduling the payment of regular bills. No more guessing when you’ll have sufficient funds.

3. It’s Secure
While checks can get lost in the mail – or even stolen, there is no chance of that happening with a direct deposit. Also, if it’s your paycheck, you won’t have to worry about your or your employer’s info ending up in the wrong hands.


Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2022 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
SoFi members with direct deposit can earn up to 3.25% annual percentage yield (APY) interest on Savings account balances (including Vaults) and up to 2.50% APY on Checking account balances. There is no minimum direct deposit amount required to qualify for these rates. Members without direct deposit will earn 1.20% APY on all account balances in Checking and Savings (including Vaults). Interest rates are variable and subject to change at any time. These rates are current as of 11/3/2022. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet
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