Budgeting is the process of laying out your income and expenses to stay within your means—often with bigger financial goals in mind. Tracking this month’s groceries might mean an autumn trip to Mexico. Or it could mean being debt-free by the end of this year.
Create a no-shame budget or spending plan using the steps we lay out, with strategies from experts.
Why You Need a Budget
On a practical level, a budget helps you track spending and avoid missed payments—but a budget can also help you realize your real-world dreams.
Helps You Plan
Going into every month with a budget or spending plan can help set spending intentions and boundaries, and give your money “purpose,” said Carrie Friedberg, a certified money coach at SFMoneycoach.com. She recommends customizing your spending plan every month.
“Everyone can develop a basic budget with fixed or common expenses, but it’s important to scan your calendar, check your periodic expenses calendar and talk to family members about what’s happening or expected each month, so you can plan accordingly,” she said in an email to The Balance.
Helps You Find Opportunity
Most budgeting advice emphasizes cutting back but consumers could benefit from viewing their budget as an opportunity rather than spending cutbacks, said Jim Pendergrast, senior vice president at specialty business lender altLINE.
“No more Starbucks, eat out less, buy second-hand,” Pendergast wrote in an email to The Balance. “While this is intuitive—you do have to live within your means—it warps real financial freedom, which is to create sustained wealth. Change your budgeting mindset from scarcity to opportunity.”
Helps Make Tax Time Easier
Budgeting now can help you in April, too, said Logan Murray, a financial planner and tax preparer at Tempe-based Pocket Project, LLC. Tax time doesn’t have to be too difficult anymore, thanks to tax prep software programs.
“The big headache is going through the entire year of transactions or items sent in the mail to find everything that needs reporting,” he said in an email to The Balance.
With a budget in place (and maintained), you will have already collected much of that information.
For tax reasons, it can be essential to keep track of income, and spending in categories like charitable contributions, education, child care, and health care.
Gather Your Income Data
So, let’s get started. In this first step, you’ll collect all the ways your money flows into your financial stream.
Include the following:
- Workplace paystubs
- Gig work or irregular income
- Federal or state benefits, including disability or unemployment
- Child support or alimony payments
- Scholarships or grants, if in school
- Venmo transactions or other person-to-person payments
You may be able to find this information on your bank statement, but don’t forget about tips and other cash payments. However, regular income sources are the priority here—you may not want to include occasional windfalls, such as tax refunds.
Now, from these sources, note your net income last month—the money you took home monthly to spend. So, you won’t include taxes, Social Security, other deductions, or any contributions you’ve made to your retirement account.
Freelancers, business owners, and the self-employed may need to use six to 12 months of income and determine an average monthly income, for a reasonable basis for your upcoming money math.
Next Steps and More Resources
Congratulations! You just took your first budgeting step. For the next step, you’ll prepare to collect and classify your expenses, to later enter them (along with the income you’ve just gathered) into The Balance’s Simple 50/30/20 Budget spreadsheet.
In the meanwhile, learn more about tracking spending and budgeting:
- Discover more Reasons Why You Should Budget
- Read more about Creating Your First Budget
- See our Budgeting Step-by-Step Guide for lots of tips, tricks, and resources.