How to make a personal budget in 8 easy steps—plus tips for actually using it

If you’ve never made a budget before, don’t worry. Here’s how to get started with a simple budget based on last month’s spending habits.

The first step of budgeting is determining how much money you make each month. If you have one salaried job, you’ll find this information on your paystub—it’s the amount you take home per paycheck. If you get paid on 15th and 30th of each month, you simply multiply your paycheck amount by two. If you get paid biweekly, you’ll want to multiply your paycheck amount by 26 and then divide by 12. 

If you have more than one job, have irregular income, or you’re self employed, the process for determining your net income (which is different from your gross income) is a little different. Learn how to calculate net income in our complete guide.

Fixed expenses are expenses that stay the same from month to month. These might include: rent, car payments, repayment of student loans, internet and phone bills, credit card debt payments, automatic deposits into a savings account, and insurance. Write them all down on a piece of paper, fill out a budget worksheet, or make a budget spreadsheet—whatever feels easiest to you.

Crunch the numbers to find out how much you spend on fixed expenses every month. Since this number won’t change much from month to month, you can use it as a foundation for your monthly budget. Subtract your total spending on fixed expenses from your net income to find out how much you have left over for variable expenses.

Variable expenses are expenses that change from month to month, such as groceries, restaurants, shopping, fitness classes, and gifts. To estimate your variable expenses, check your receipts and online banking and credit card statements (and don’t forget apps like Venmo and PayPal!). List every single thing that you spent money on last month that wasn’t a fixed expense. Even though these numbers will change each month, starting with last month’s purchases should give you a solid estimate of your spending habits.

Add up all of your variable expenses and add that number to your total spending on fixed expenses. Is that number more or less than your total net income? If it’s more, you’re living above your means.

Now that you have your lists of fixed and variable expenses, sort everything into categories. It can be helpful to use both broad categories, like “food,” along with specific subcategories, like “restaurants,” “groceries,” and “coffee,” to learn more about your specific spending habits.

Add up your total spending per category. To find out what percent of your income you spent on each category, divide your total spending per category by your net income and multiply by 100%. Looking at the percentages can be a handy way to understand how much of your money is going where.

Now that you have your spending laid out in front of you, it’s time to check in with your financial goals and make changes to your budget. If you’re spending more than you make, identify areas where you can cut back. 

Variable expenses are easier to cut back than fixed expenses; however, if you are vastly overspending on fixed expenses it can be hard to compensate for that. If you are overspending on rent, consider a less expensive housing option—for example, living with roommates. Learn how living in a Bungalow shared home can save you money every month.

If you have money left over at the end of the month, congratulations! That means you can allocate more money towards savings. 

Next to each category’s total, make a new goal for next month’s spending. Congratulations! You now have a monthly budget that you can use to guide next month’s spending.

If you’ve determined your net income and your average spending, but you’re not sure how to turn that information into an actual budget, don’t worry. There are lots of budgeting strategies out there. Here are a few of the most popular:

1. The 50/30/20 rule: The 50/30/20 budget rule is one of the most popular methods for budgeting. This budgeting plan involves breaking your spending into three broad categories: essentials, nonessentials, and savings. Then, it suggests spending 50% on essentials, 30% on nonessentials, and 20% on savings. 

2. Zero-based budgeting: Unlike most budgets, which are based on an estimate of how much you will make each month, zero-based use the income you made the previous month to pay for everything you need this month. The “zero” comes from the idea that every single dollar gets a specific role, so that at the end of the month, you end up with zero dollars.

3. The envelope system: The envelope system can be a helpful strategy for people who have a hard time sticking to a budget. Under the traditional envelope system, every time you get paid, you take out cash. The cash goes in separate envelopes for each category in your budget. When an envelope runs out, that’s it. If cash isn’t a realistic option for you, there are apps that translate this system for the digital world, such as Goodbudget.

A budget is no good to you sitting in a drawer. Here’s how to make your budget work for you, not against you.

1. Set specific goals. You’ll be much more likely to stick with your budget if your goals are specific, rather than to just “save money.” Create separate savings accounts for each financial goal to track your progress, and if you’re trying to cut back in certain categories, give yourself an exact dollar amount to work with.

2. Make incremental changes. If looking at last month’s spending has made you realize that you need to dramatically cut back in some areas, don’t try to do it all at once. Instead, decrease your spending in that category a little bit each month to ease into the transition. 

3. Figure out what’s important to you. Budgeting is a great time to reevaluate what’s important to you, and to make sure that’s where you’re actually spending your money. Spend your money guilt-free in those areas, and cut back on the stuff you don’t actually care about. If your budget is true to your values, it’ll be easier to stick to it. 

4. Use the tools that work for you. Set yourself up for success by choosing the budgeting tool that actually works for your lifestyle, whether that’s a pen-and-paper ledger that you write in every day, a customized budget spreadsheet, or an app that keeps track of everything for you. Tools are there to help you; if they frustrate you more than the budgeting itself, it’s time to try a different one.

5. Automate and oversee. The best way to make sure you don’t accidentally spend the part of your income reserved for savings is to set up automatic payments to your savings and retirement accounts. Automating payments is a great way to make sure you don’t fall behind on important bills. Look over your automated bills and payments every month to make sure you aren’t getting overcharged. 

6. Review your budget. Setting a time each week to look over your finances will give you room to adjust your spending throughout the month. It also avoids the problem of purchases you don’t remember making. Your budget is a living document, so if the end of the month, evaluate your budget and make any necessary changes.

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