July 23, 2018

How to Make a Budget

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A budget will help you track your finances and reach your goals sooner. Here is a simple step-by-step of how to make a budget that actually works.

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Is money tight every month?

Will an emergency wipe out your savings?

You're not alone. 2 out of 5 Americans have less than $500 in their savings. This is like a high-wire act without a net - it's stepping into the unknown with nothing below your feet.

Without a spending plan, an unexpected expense can create major problems. Routine things like new tires or a root canal can result in a steady diet of instant noodles if you don't manage your money with a budget.

And the worst part is that it's almost impossible to save. You may find it hard to save for a house or even a vacation to your dream destination.

The solution is simple.

Take control of your spending by making a budget.

How to Make a Budget:

  1. Verify your income
  2. Track and write out all your expenses
  3. Set your goals
  4. Identity needs and wants
  5. See where you can trim so you can reach your goals

A budget will help you see exactly how much money you have to work with a month. You'll be able to figure out what you can cut costs on and how much you can save.

Read on for 7 simple steps to making a budget.


You don't need to get all fancy. Your initial budget can just be basic paper and pencil. List income on one side and expenses on the other. As you develop financial savvy, you can try out some other formats.

  • Bullet journal. Get a journal and write down your expenses, goals, etc. You can get really creative here. A lot of journal lovers get a thrill out of creating beautiful handwritten spreads and tracking their goals.

  • Ledger or spreadsheet. You can create a simple budget spreadsheet on Excel listing out your income and expenses.

  • Apps. For the more tech savvy, nowadays, there are tons of budgeting tools such as Mint, Personal Capital, BudgetPulse, and BudgetSimple. But you'll have to be comfortable with linking your bank accounts and credit cards so the app can extract the information.

Many banks also offer free online budgeting tools to their customers. For example, Chase offers Chase Blueprint and Wells Fargo offers Budget Watch.


You net income - often called take-home pay - is what you get after all deductions are made from your paycheck (like taxes and 401(k) contributions). This is what you want to use when making your budget.

For most people, all you have to do is look at your paycheck and see what you're earning. People in 9 to 5 jobs usually have steady pay and the taxes and other deductions are already taken out.

If you're a freelancer or have your own small business, this is a little harder. Look back at your earnings over the past year. Calculate an average. But you'll have to remember to deduct taxes and any retirement savings and healthcare you pay for on your own.


For a couple of months, write down every single thing you spent money on. You need to know how much you're actually spending.

Most people think they spend less than they actually do. Small purchases like magazines, snacks, and coffees add up to more than people realize.

You want to list:

  • Fixed expenses. That'll be rent, utilities, insurance, student loan, and car payments.

  • Necessary expenses, but not fixed. That's things like gas and groceries.

  • Discretionary spending. Those are "fun expenses," such as eating out, clothing, and entertainment.

Do this exercise for a few months to get an idea of your average monthly spend. You can separate your expenses into categories.

Your monthly bank and credit card statements often itemize expenses and are a good place to start. It you pay cash for routine expenses, don't forget to include those too. Save your sales receipts to get an accurate amount.


Don't forget about your goals in your budget. Making goals is what will help you stick to your budget, because you'll have something to aim towards.

Make a list of your short-term and long-term goals.

  • A short-term goal is one that can be reached in a year or less - perhaps a spiffy stereo or a trip to Disney World.

  • Long-term goals could be buying a house or sending your children to college. These will take years to achieve. You can only reach them by keeping short-term expenses in line.

We also recommend that one of the most important goals be to build up an emergency fund. This way, you have backup if you unexpectedly lost your job. Resist the urge to consider this reserve fund as mad money to be spent frivolously.

Put your savings into a high-yield savings account. It doesn't have to be a large amount, and you will soon discover the virtue of compound interest - interest paid on interest. This will help you grow your savings little by little.

Related: How Much Should I Save?


You now know how much money you have each month and where it's going. Now it's time to see where you can trim. Set priorities and shift money as needed to reach your goals.

Make a crucial distinction between needs and wants.

If you drive to work each day, gasoline and scheduled maintenance are a need. But pizza, seeing the latest blockbuster in 3D, or a new pair of fancy running shoes are wants.

To adjust your budget, you want to trim from your wants. Think: can you get another year or two out of your car? Do you need a fancy flat panel TV? Can you rent a movie at home instead of seeing the latest blockbuster in theaters?

With a clear idea of your spending, it's easy to make adjustments as necessary.


Now that you know your take-home pay, expenses, and goals, it's time to make a budget.

Let's say your take-home income is $3,500 a month. And your monthly expenses look like this:

  • Rent: $1,000
  • Car payment and insurance: $400
  • Student loan payment: $200
  • Credit card payment: $200
  • Utilities/gas: $300
  • Groceries: $200
  • Fun spending: $800
  • Total: $3,100

Your monthly savings goals look like this:

  • Emergency fund: $100
  • House down payment savings: $500
  • Dream vacation fund: $100
  • Total: $700

You're $300 over budget and won't be able to hit your goals. Trim from your fun spending. Aim for spending just $500 a month on wants, such as shopping, eating out, and entertainment.

Of course, if you spend less than that, then you can put more money towards your savings and be able to buy a house or go on vacation sooner.


Income and expenses will evolve as your career advances. Make adjustments as needed.

For example, maybe your rent increases every year. Or you got a new job that's further away and thus requires more gas.

It's natural to spend more as you earn more. If you don't make a budget, it's easy for expenses to outpace your higher income. This will make it impossible to achieve your goals.


If you follow these basic steps, making a budget is a detailed but straight-forward task. A budget will prevent aimless spending and help you avoid living paycheck to paycheck. A spending plan also will help you save for your long-term goals.

The hard part comes next: Now, you have to stick to your budget. Keep your goals in mind and good luck.

Disclaimer: Opinions expressed here are those of the author's alone. Please support CreditDonkey on our mission to help you make savvy financial decisions. Our free online service is made possible through financial relationships with some of the products and services mentioned on this site. We may receive compensation if you shop through links in our content.

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