How to Create a Budget in 5 Simple Steps

How to create a budget in 5 steps! I didn't know it could be so easy.

I like this. It makes me feel like I can do this. These 5 steps were easier than I imagined.Managing your money is one of the cornerstones of a balanced life.

But if you’re not sure how to create a budget, it becomes difficult if not impossible to do.

Even if you’ve got everything else in your life under control and in perfect balance, when you neglect your finances, you’ll always feel off.

Learning How to Create a Budget Doesn’t Have to be Hard

If you’ve had a love/hate relationship with money in the past, it’s OK.  We’ve all been there.

Just like you create balance in any other area of your life, when you create a budget, it’s a matter of following a few proven steps to success.

This isn’t difficult to do but depending on whether you’re revamping an existing budget or creating one from scratch, it could take a bit of time to set up.

So, it’s important to give yourself permission to complete it in stages if you need to.

The main thing is that you do it right regardless of how long it takes because once it’s set up properly, you’ll finally find the balance in your financial life you’ve been searching for.

Step 1 – Your Net Income

First things first.  Do you have a partner that you share joint accounts with or do you have your own?  If you pool your money, you’ll need your net income as well as theirs.

Either way, this should be fairly easy to find.

Net income is, of course, what you bring home after taxes, retirement, insurance, and any other deductions are taken out.

If you or your partner, work a side job with irregular hours or pay, figure an average monthly net income using the past year if possible.

Step 2 – Your Expenses

This is the step that usually freaks people out because expenses tend to be a little more scattered.

While your car payment and credit card statements come in monthly, there are other expenses like property taxes that are only due once per year.

Then there are things like birthdays, holidays, and clothing expenses that need to be factored-in as well.

How to Make Extra Money With Your Budget

My favorite way to handle these quarterly or yearly expenses is to set up an interest-bearing account.  A good choice is a money market account.  Then set aside the funds to cover these sporadic expenses there.

This way, you can add a little money in this account to cover these bills each time you’re paid and earn interest while you wait for them to come due.

Gather Your Bills

But, before you begin to create a budget, you’ll need to locate the past 12 months of bills and expenses.

In the event your organizational skills leave something to be desired, don’t worry, there are ways around this.

If you pay most of your bills with your credit or debit card, you can go online and see your prior statements.

Depending on your bank, you can usually go back and see statements for the past several years, which will be more than enough.

Determine What You’re Paying Each Month

Record your fixed monthly expenses, like mortgage payments and car payments first.  Then, look at your other monthly expenses like utilities, cable or satellite, cell phones, credit cards, groceries, etc.

These will sometimes fluctuate based on usage but they’re still due on a frequent basis.

Next, locate the expenses that don’t occur monthly.  This is why having at least a year’s worth of records is important.  It allows you to see those expenses easily.

For these bills, you can take the total amount due for the year and divide it by 12 to get a monthly average.


If you have car insurance payments in the amount of $650.00 twice per year, then you’d owe $1,300 for the entire year. 

Then divide $1,300.00 by 12 months to find out that you would owe $108.33 per month for car insurance.

Take it a step further, and divide $1,300.00 by 52 weeks and find that you owe $25.00 per week in car insurance.

It’s much easier to set aside $25.00 per week than it is to come up with $650.00 every six months.

You can deposit this $25.00 into your money market account each week and earn interest until the money is due.  Win/win.

Don’t Forget to Track Cash Expenses

And finally, don’t forget about the little things you may buy with cash.  A few dollars here, a couple more there, can really add up.

I find it easiest to track these by using a mobile app like Quicken, Mint or Spending Tracker.

Some of these can even sync with your personal finance software making it that much easier to keep up with your cash.

Step 3 – Your Goals

At this point, you should have an accurate list of all your income and expenses broken down by month.  This is where you are right now.

If you don’t like what you see, now’s the time to change it.

More often than not, once you see where your money is going, you can easily spot areas where you can cut back.

Even small changes can make a big difference when done consistently over the course of several months or a year.

Now is the time to set goals for your financial future.  If you have credit card debt, I would suggest starting with that.

Nothing is more costly or damaging to your credit than credit card debt.

Budget for Things You Know Are Coming – And Those You Don’t

You need to be realistic about how much you plan to spend for holidays and birthdays and make sure you have the money set aside in your budget to cover these expenses.

There’s nothing more satisfying than waking up Christmas morning with lots of happy faces and no debt!

Other great goals could include setting up an emergency fund (six months of expenses is a nice target), paying off your vehicles early, setting aside money for your kids’ college tuition, and even paying off your mortgage early.

But, these things won’t happen on their own.  You have to set goals and create a realistic plan to make them a reality.

Step 4 – Your Plan

At this point, you know where you stand financially.  You’ve figured out some ways to cut expenses, set a few goals, and you’re feeling pretty good – hopefully.

But what if you’re not?  What if your new budget has revealed that you’re spending more than you thought in certain areas?

It happens to the best of us.  After all, it can be really hard to keep up with what’s going out if you don’t actively stay on top of it.

Make the Right Choices

If you find that you’re spending almost everything you make or worse, that you’re using credit cards to supplement your income, you’re going to have to make some choices.

Keep in mind that giving up certain things in favor of a balanced budget is always a good choice.

You’ll feel so much better once you see progress toward your goal of having less stress, more money at the end of each month, and more money for the things that really matter.

If something is really important to you, find ways of cutting back in other areas.  Just because you create a budget it doesn’t have to mean giving up all the good stuff in life. 

It simply means you prioritize the things that are most meaningful and cut back on the ones that are less important.

But Don’t Forget to Have a Little Fun

Once you turn things around, be sure to set aside a few bucks in your budget to have a little fun.  You’re going for balance, not deprivation and it can be a fine line between being responsible and becoming an obsessive miser.

After all, life’s a journey so make it as enjoyable as possible on the way to reaching your goals.

Step 5 – Keeping Up with It All          

Once you’ve created your budget, software provides easy ways to maintain it.  One option is using an Excel spreadsheet to create a budget worksheet.

There are also lots of money management programs designed for budgeting.

I’ve used Quicken for years and absolute love it.  It allows me to sort, search and classify expenses so I can quickly and easily find everything I need.

However, there are also free options like which work great if simple budgeting is all you’re looking for.

Whatever method you choose, make sure you update it consistently and re-check it often.  A great budget will only work if you work it.

Riding Off into the Sunset

In a perfect world, you could create a budget, set it, and forget it.  But we don’t live in a perfect world.

However, by putting in the time to figure out where you stand financially and deciding what it will take to get you where you want to go, your financial life becomes a lot easier.

You’ll have parameters to help you control spending.  Plus it will be easy to spot surprise increases in your monthly expenses that you may not have noticed before.

You can relax knowing you have extra money set aside earning interest for taxes, insurance, holidays, birthdays, vacations, and other periodic expenses.

By using a money management program or spreadsheet, you have an easy and consistent way to monitor your spending.  And you’ll be able to see your weekly, monthly and yearly progress toward your goals.

Financial balance is within your reach.  And once you’re on your way to achieving it, you’ll feel an overwhelming sense of relief that only comes from a deliberately balanced life.

Do you have ideas on How to Create a Budget you’d like to share? 


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