How to create a budget in 5 steps (2024)

Creating a budget is a great way to track where your money goes each month and an important step to getting your finances in order. A budget can make it easier for you to achieve financial milestones, such as building an emergency fund or saving for a down payment on a home.

While the task may seem daunting, it's not that difficult to create a budget. Plus once you have one, the bulk of the work is done and you can make minor tweaks as your spending habits or income change. There are many websites and budgeting apps that you can use to get started, or you can create your own spreadsheet.

Below, CNBC Select reviews how to create a budget using a spreadsheet, but many of the steps are the same as other budgeting methods. Feel free to get creative with it — you can download templates online through Google Sheets, Microsoft Excel and other sites or start from scratch.

Here's how to create a budget in five steps.

How to create a budget

  1. Calculate your net income
  2. List monthly expenses
  3. Label fixed and variable expenses
  4. Determine average monthly costs for each expense
  5. Make adjustments

1. Calculate your net income

The first step is to find out how much money you make each month. You'll want to calculate your net income, which is the amount of money you earn less taxes.

If you receive a regular paycheck through your employer, regardless if you're part-time or full-time, the amount listed is likely your net income.

Keep in mind that if you're enrolled in a health insurance plan, flexible spending account (FSA) and/or a retirement account through your employer, the money is often automatically withdrawn from your paycheck. You'll want to subtract those deductions to make sure you have a clear picture of your take-home pay.

If you freelance, are self employed or simply don't receive a regular paycheck, you'll need to subtract taxes from your income amount. The self-employment tax rate is 15.3%, according to the IRS. You can use this TaxAct calculator to estimate how much taxes you're required to pay in a year. Then you can divide by 12 to get a monthly estimate.

2. List monthly expenses

Next, you'll want to put together a list of your monthly expenses.

Here are some common expenses:

  • Rent or mortgage payments
  • Loan payments (such as student, auto and personal)
  • Insurance (such as health, home and auto)
  • Utilities (such as electricity, water and gas)
  • Phone, internet, cable and monthly streaming subscriptions
  • Child care
  • Groceries
  • Transportation (such as, gas, train tickets and bus fares)
  • Household goods
  • Dining
  • Travel
  • Gym memberships
  • Miscellaneous (such as, gifts, entertainment and apparel)

It's also good to include details on how much you're saving each month, whether that's into traditional orhigh-yield savings accountsor a personal retirement account, such as a Roth IRA.

3. Label fixed and variable expenses

Once you've compiled a list of your monthly expenses, label whether they're fixed or variable. Fixed expenses are bills you can't avoid: rent, utilities, transportation, insurance, food and debt repayment. Variable expenses tend to be more flexible — your gym membership, for instance, or how much you spend on dining out.

If money was tight, you could always drop your gym membership and curtail your dining out spending, but you are likely always going to have to pay rent or your mortgage.

4. Determine average monthly cost for each expense

After you separate fixed and variable expenses, list how much you spend on each expense per month. You can look up your spending on bank and credit card statements.

Fixed expenses are easier to list on your budget than variable expenses since the cost is generally the same month-to-month. For example, debt repayment on a mortgage or auto loan will cost the same each month. But fixed utilities, such as electric and gas, and variable costs, such as dining and household goods, often fluctuate month-to-month, so you'll need to do some math to find the average.

For these categories and any where you spending changes from month-to-month, determine the average monthly cost by looking at three months worth of spending. To calculate the average amount you spend on groceries, for example, add up all of your grocery spending during the past three months and divide by three.

If you find that the average you spend on groceries each month is $433, you may want to round up and set the spending limit to $450.

5. Make adjustments

The last step in creating a budget is to compare your net income to your monthly expenses. If you notice that your expenses are higher than your income, you'll need to make some adjustments.

For instance, let's say your expenses cost $300 more than your monthly net pay. You should review your variable expenses to find ways to cut costs in the amount of $300. This may include reevaluating how much you spend on groceries, household goods, streaming subscriptions and other flexible costs.

It's a good idea to reduce these costs and regularly make adjustments to the amount of money you spend so you can avoid debt.

On the other hand, if you have more income leftover after listing your expenses, you can increase certain areas of your budget. Ideally, you'd use this extra money to increase your savings, especially if you don't have an emergency fund. But you could also use the money on non-essential things like dining out or traveling.

If you don't yet have a high-yield savings accountconsider opening one, such as Marcus by Goldman Sachs High Yield Online Savings, and earning 16 timesmore interest than traditional accounts.

Next steps

After you finish creating a budget, the next step is to stick to it. You can hold yourself accountable in a variety of ways. For starters, you can set reminders with your credit card and bank accounts when you reach a preset spending amount. You should also try tracking all of your expenses into your spreadsheet or budgeting app right after you make a purchase. And if you share expenses with someone else, make sure you're both on the same page with the budget and keep each other on track.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.

How to create a budget in 5 steps (2024)

FAQs

How to create a budget in 5 steps? ›

The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.

What are the 5 steps of the Budgeting process? ›

How to create a budget
  • Calculate your net income.
  • List monthly expenses.
  • Label fixed and variable expenses.
  • Determine average monthly costs for each expense.
  • Make adjustments.

What are the 5 steps to calculate your budget? ›

How to make a monthly budget: 5 steps
  1. Calculate your monthly income. The first step is to determine how much money you earn each month. ...
  2. Track your spending for a month or two. ...
  3. Think about your financial priorities. ...
  4. Design your budget. ...
  5. Track your spending and refine your budget as needed.
Oct 25, 2023

What are the 5 basics to any budget? ›

What Are the 5 Basic Elements of a Budget?
  • Income. The first place that you should start when thinking about your budget is your income. ...
  • Fixed Expenses. ...
  • Debt. ...
  • Flexible and Unplanned Expenses. ...
  • Savings.

What are the 5 steps to creating a spending plan? ›

5 Steps to Creating a Budget
  1. Step 1: Determine Your Income. This amount should be your monthly take-home pay after taxes and other deductions. ...
  2. Step 2: Determine Your Expenses. ...
  3. Step 3: Choose Your Budget Plan. ...
  4. Step 4: Adjust Your Habits. ...
  5. Step 5: Live the Plan.

How to create a budget for beginners? ›

Follow the steps below as you set up your own, personalized budget:
  1. Make a list of your values. Write down what matters to you and then put your values in order.
  2. Set your goals.
  3. Determine your income. ...
  4. Determine your expenses. ...
  5. Create your budget. ...
  6. Pay yourself first! ...
  7. Be careful with credit cards. ...
  8. Check back periodically.

What is the 50 30 20 rule? ›

The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.

What are the 4 rules of budgeting? ›

Give Every Dollar a Job. Embrace Your True Expense. Roll With the Punches. Age Your Money.

What is a good budget plan? ›

In the 50/20/30 budget, 50% of your net income should go to your needs, 20% should go to savings, and 30% should go to your wants. If you've read the Essentials of Budgeting, you're already familiar with the idea of wants and needs.

What are the 7 steps in creating a budget? ›

Budgeting Basics: 7 Steps to Building Your First Budget
  • Why is Budgeting Important? ...
  • Define Clear Financial Goals. ...
  • Digitalize Your Expense Tracking. ...
  • Calculate Consistent Monthly Income. ...
  • Categorize and Analyze Expenses. ...
  • Craft and Fine-tune Your Budget. ...
  • Regularly Update Your Strategy. ...
  • Prioritize an Emergency Fund.

What is high five budgeting method? ›

Created by Sahirenys Pierce, a personal finance influencer and educator who has previously worked in the financial sector, the high-5 banking method refers to having five bank accounts total: two checking accounts and three savings accounts.

What is a key to a successful budget? ›

A well-designed and practical budget is always workable. It should include all sorts of long and short-term plans and expenses with a practical approach. A flexible budget is always a successful one. To execute the plans and achieve the goals, a budget must be flexible.

What are the 7 steps in the budget process? ›

Budgeting Basics: 7 Steps to Building Your First Budget
  • Why is Budgeting Important? ...
  • Define Clear Financial Goals. ...
  • Digitalize Your Expense Tracking. ...
  • Calculate Consistent Monthly Income. ...
  • Categorize and Analyze Expenses. ...
  • Craft and Fine-tune Your Budget. ...
  • Regularly Update Your Strategy. ...
  • Prioritize an Emergency Fund.

What are the 4 budgeting procedures? ›

Common processes include communication within executive management, establishing objectives and targets, developing a detailed budget, compilation and revision of budget model, budget committee review, and approval.

What are the 4 processes of budgeting? ›

phases: budget preparation, budget legislation or authorization, budget execution or implementation and budget accountability. While distinctly separate, these processes overlap in implementation during a budget year.

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