How to Set up a Budget

Use this step-by-step process to create a monthly plan for your money

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Setting up a budget may seem like a daunting task, but there's no reason to be intimidated by the process. A budget is simply a plan for how to spend your money that you create at the beginning of every month and re-evaluate at the end of the month.

Once you learn how to set up your budget, you can easily see where your money is going and how much you have left to save and spend and tweak your financial habits as needed. Just follow these easy steps.

Gather Financial Documents

You'll need to reference your monthly income and expenses as you set up your budget. Gather the documents detailing your income for a month, such as pay stubs from paychecks or invoices if you're self-employed. Likewise, compile past bills for mortgage or rent, utilities, or car payments, along with credit card or bank statements detailing food, entertainment, and clothing purchases, so that you can determine your expenses.

Prepare a Budget Worksheet

While you can use old-fashioned pen and paper to budget your money, it's easier and more efficient to create or download a basic monthly budget spreadsheet. A pre-made budget worksheet will generally contain designated fields for income and expenses in various categories and built-in formulas to help you figure your budget surplus or shortfall with minimal math.

Determine Your Income

It is important to know exactly how much money you have coming in each month so that you know how much you can afford to spend. Based on the income documentation you gathered, record your monthly income in each of the income categories (wages, self-employment income, and interest income, for example). If you've recently started a new job, consider using a payroll calculator to determine how much money you will bring home each month. Then, add up all of these individual amounts and record the total monthly income.

If you have a variable income (from a seasonal job, for example), consider using the income from your lowest-earning month in the past year as your baseline income when you set up your budget.

Figure Your Fixed Expenses

These are expenditures that do not change from month to month, such as housing (mortgage or rent payments), a car payment, or a student loan payment. If you plan to save a fixed amount or pay off a certain amount of debt each month, also include savings and debt repayment as expenses. Write down the expense totals in each of your spending categories and then add them up and record your total monthly expenses.

Calculate Your Variable Expenses

After you have listed your fixed expenses, determine the amount that you spend on variable expenses that vary from month to month, including food (groceries and eating out), entertainment, clothing, and household products. Also include seasonal expenses as you plan your budget, such as an annual flight home during the holidays.

If you're not sure how much you spend in this category, review the last two or three months of credit card or bank transactions in each category to make a rough estimate. Remember: These are all flexible expenses that you are largely in control of and can cut back on if you need to each month.

Compare Your Expenses to Your Income

Next, subtract your total monthly expenses from your total monthly income.

If, as is ideal, the difference is more than zero, you have a budget surplus. Consider putting that extra money toward savings or debt repayment or towards "wants" such as a vacation. In a 50-30-20 budget, "needs," or essential expenses, should represent half of your budget, wants should make up another 30%, and savings and debt repayment should make up 20% of your budget.

If, however, the amount is negative, you have a budget shortfall and should look for ways to bring your expenses below your income. You may have to cut back significantly on your variable expenses (eat out less, for example), search for new service providers to lower your fixed expenses, or increase your income through a part-time job, freelance work, or a more lucrative full-time job.

If you want to know exactly where every dollar will go each month, set up a zero-based budget, a type of budget where your expenses and income match. You will assign every dollar a specific purpose, and if your amounts do not match, you will need to adjust accordingly until there is no more left to budget by the end of the month.

Track Your Expenses

After you have set up your budget, it's imperative that you monitor and record your expenses in each category, ideally every day of the month. Enlist the same budgeting spreadsheet you used to record your expense and income totals, or use software or an online app like You Need a Budget.

Having an estimate of what you have spent in each category throughout the month will keep you from overspending and help you identify unnecessary expenses or problematic spending patterns. If you take a few minutes each day to record your expenses, you will likely spend less time then you would if you put it off until the end of the month. 

If you're not confident that you can budget your money, adopt the envelope system where you divide cash for spending into separate envelopes for different spending categories. When an envelope becomes empty, you'll have to stop spending in that particular category.

Adjust as Needed

If surprise expenses arise during the month, you can easily make changes to your budget after you set it up. For example, if need an emergency car repair, you might move money from your clothing expense category to help cover the cost of the repair. As you move money from one category to another, make the same change in your budget; this is the key to making your budget work as it can help you deal with unexpected expenses without having to rely on a credit card.

Evaluate Your Budget

After you have followed your budget for a month, you may find that you can cut back in a few areas but need more money in others. You should evaluate your budget at the end of every month and make changes according to the expenses in the upcoming month. This practice will help you adjust your spending as your life changes and your spending increases in different areas.

Budgeting Tips

Once you have set up a basic budget, customize it according to your financial situation and goals:

  1. If you work on commission, be aggressive in saving to help cover periods when the market is slow. 
  2. If you have cash flow issues because you are paid only once a month, divide that payment by weeks and keep the cash you planned to spend in remaining weeks in a savings account until you need it.
  3. If you tend to overspend in certain categories, switch to a cash-only budget or use other budgeting hacks.
  4. If you want to save more each month, cut the cord, choose less expensive brands, or take advantage of discounts.
  5. Pick up other financial skills that you should have learned while you were in high school to improve your financial literacy and make your money work harder for you.

Article Sources

  1. Federal Trade Commission. "Making a Budget." Accessed April 1, 2020.

  2. Consumer Financial Protection Bureau. "Budget Scenarios," Page 1. Accessed April 1, 2020.

  3. Capital One. "How to Budget When You Have an Irregular Income." Accessed April 1, 2020.

  4. Federal Student Aid Office of the U.S. Department of Education. "Not Sure Where to Start in Creating and Managing Your Own Budget?" Accessed April 1, 2020.

  5. Chime. "How to Make a Budget: A Guide to Choosing the Right Budgeting Style." Accessed April 1, 2020.