One thing I hear over and over again when it comes to beginning financial planning is that you need to begin budgeting. Everyone talks about budgets, and they are incredibly useful tools. But what is a budget? A budget is a guide for where your money will go so you can make it work for you. Budgeting gives your money a job and sets spending limits so you can use your money responsibly. 

Creating a budget is essential to developing good spending habits, setting aside money for the future, and ensuring the money in your bank account goes where it needs to. But how do you make a budget?

Getting started with your first budget may seem complicated, and it can be but with these simple steps it should be a breeze.

First things first, why are you here? Why do you want a budget?

Begin Budgeting


1. Why do You Want a Budget?

For what reason, either in the future or now, do you feel you need or want a budget? Is it to save more money? Reduce overspending? Break the paycheck-to-paycheck cycle? Getting out of debt? Or do you just want to form strong habits before you get into any trouble? These are just some common reasons for starting down the budgeting road.

While budgeting is always a great decision, it’s good to define goals before you start the process, since the reasons you’re budgeting may impact choices you make during the process. While it may seem silly to think about your motivations, psychology does a lot for how we handle money. In fact, the University of Maryland research into budgeting showed that just the process of creating a budget makes it more likely the goals will be achieved. This is because figuring out the numbers enhances motivation, makes your position clear and gets you emotionally invested.

2. Where is Your Money Going Now?

Before you can create a realistic budget, you need to know what you are spending money on now, what do you habitually buy? If your budget isn’t grounded in reality, it’s nothing more than a fancy wishlist that won’t be looked at again.

You won’t know if your budget is realistic until you’ve got an idea of where your money is going. We advocate tracking your payments for thirty days to really get an idea of what you spend on. You can go about this several ways, a few I recommend include:

  • Entering your expenses into a programme or notebook, such as excel: Whenever you create a purchase, write it down or enter it into a spreadsheet. This is the most typical approach but it can be easy to forget to input a purchase or lose a receipt.
  • Use an app: Apps such as Dollarbird, Mint, and PocketGuard make it simple to track spending by linking your credit cards and bank accounts. Once all accounts are linked and labeled properly you are good to go. 
  • Use your statements: This is how I usually do it. Your credit card and bank statements can help track spending, although this approach is less likely to produce the most detailed results because you may not remember what a particular transaction was for. However, if you want to get started with your budget right away, going back over previous statements can give you a general picture. The more frequently you do it, the easier it will be to remember what the mystery purchases were.

The majority of people don’t actively know what they are spending money on month to month. Just starting tracking those expenses puts you ahead.

3. Track Holidays and Irregular Expenses

While tracking spending shows you where the money goes day in and day out, your budget should also factor in fun and irregular expenses, such as holidays and birthdays. I recommend using a calendar to keep you notified of when these will come up and keeping them separate from your day-to-day.

 Some irregular expenses in your budget would possibly include:

  • Birthdays
  • Annual insurance premiums
  • Christmas, Hanukkah, or alternative gift-giving holiday
  • Annual automobile inspections and registrations
  • Annual vacations
  • Property taxes
  • Family Trips
  • Annual medical exams, together with veterinary exams

Your calendar and past statements can help you track and forecast all expenses that take place throughout the year.

4. Find out How Much Money is Coming in.

Budgeting is not only about where your money is going, it’s knowing how much is coming in as well. Think about income from all sources including:

  • Wage income
  • Alimony and/or child support
  • Business income 
  • Income from investments
  • Birthday money
  • One-off income sources

If how much money you make is not always consistent, take a look at your previous years income broken down month by month. Whichever month you received the least amount in, use that number. This way any extra income can be seen as a bonus and you will never be caught without money.

Those with irregular incomes could also live off last month’s income, updating their budget each month based on what they earned the month prior — but this is a lot of extra work. 

5. Determine your Monetary Goals

Most people who make a budget do it in order to get more out of their money. This sometimes involves achieving long-range financial goals such as:

  • Saving for retirement
  • Building an emergency fund
  • Buying a house
  • Purchasing a vehicle
  • Paying off debt
  • Saving for college/Paying college loans
  • Saving for a vacation or other large purchases

Whatever your goals are, you’ll be able to align your budget around them by deciding what quantity you would like to put aside for them. Goal setting has been shown repeatedly by studies to extend motivation and achievement. To be effective, your goals should:

  • Be specific: Instead of “save for a car,” try “save $30,000 for a down payment.”  
  • Include deadlines: When do you want to buy that car or house or retire or send your kids to college? Set a target date by which you’ll need to achieve your goal. 

Setting goals is the most important part of making a budget. If you don’t have a goal for the budget, all you are doing is moving money around. Sure you learn more about where you are spending but where is the fun in that?

6. Decide How Much to Save

Now that you have your goals, how much will they cost? Break down those larger numbers into smaller, monthly amounts. If you want $100,000 for a house deposit in 5 years, save $1,666 monthly. If you want to pay off $5,000 in debt at 10% interest by the top of the year, make $440 in monthly payments. Take the large amount and divide it by the number of months you have until your deadline.

The more specific you can be about how much to dedicate to each goal, the more likely you’ll achieve it. But if you don’t want to go through this whole math exercise for each goal there is a shortcut: make a plan to save at least 20% of your income. You can devote 15% to retirement savings and the rest toward other goals.

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