How to Make a Budget: The Ultimate Guide

Getting control of your finances starts with learning how to make a budget. The process alone will show you what you're earning and spending each month—and where you might be spending beyond your means. With a clear vision of the big picture, you can make the right adjustments.

Creating a smart budget also brings benefits beyond financial ones. If you tend to get stressed about money matters, a budget can give you peace of mind and help you set goals to achieve what you want in life.

What is a budget?

A budget is a money management tool that provides an overall picture of how you earn and spend money. Budgets can take many forms, from a simple list to a series of complex spreadsheets. The information contained in your budget—including your current income, expenses, debt and tax liability—will help you to make realistic financial decisions and set future goals.

What's the best timeframe for a budget?

Budgets generally work best when created on a monthly basis so they match the schedule of household bills like mortgages and utility payments. This also allows for more flexibility as situations change. Even if you decide to create an annual budget at the beginning of the year, you may want to break up your income and expenses into separate monthly pages or columns. This can help you review and analyze trends, such as increased gas expenses during the summer travel season or higher utilities in the winter when your heater runs more frequently.

What are the major elements of a budget?

Depending on your individual circumstances, your starting point for how to make a budget can include a wide range of items at various levels of detail. However, there are several core budget line items that should be included.

Income

Adding up your personal or household income gives you the first number needed to calculate your budget. Gather payment information from the previous 6 months and use it to determine your average income per month.

The following items are considered income:

• Salary or wages. This is your net income by week, month or other pay period.
• Investment returns. This is money earned from rental properties, mutual funds or other investments.
• Miscellaneous income. This is any additional income from an inheritance, gig work or other sources.

Expenses

Next, determine your baseline spending. This is the minimum you need for necessary expenses.

Include the following items as expenses:

• Housing. This includes your rent or mortgage, utilities, homeowners insurance and any other housing-related expenses.
• Food. This is the amount you spend on groceries and dining out.
• Healthcare. This includes insurance if it's not deducted from your paycheck, as well as copays and out-of-pocket medical expenses.
• Family: This expense includes both eldercare and childcare.
• Debt: This includes monthly payments on credit cards and loans.
• Taxes: This includes federal and state income taxes owed, as well as property, capital gains, estate and relevant local taxes.
• Other spending: Clothing, pets, charitable donations and household items comprise this miscellaneous category.

Savings

Savings should also be a line item in your budget. Start by setting aside a specific amount each month until you've reached at least 3 months' worth of living expenses. This will give you an emergency fund to rely on in case something unexpected happens, like a job loss.

At this time, you might also think about savings goals, like a vacation or your kids' future college expenses. Decide what goals matter most to you and how much you can comfortably set aside to reach them.

How much to spend versus save

You can use general budgeting guidelines to determine how best to divide your money. The 60-20-20 rule is a good starting point. The rule suggests spending 60% of your money on necessary expenditures such as your housing, utilities, credit card, cars and loans. The next 20% goes toward savings goals, like your emergency fund or a retirement account. The final 20% can be spent on more flexible options, like travel and entertainment.

If you're new to budgeting, comparing the 60-20-20 guidelines to your actual spending can be a quick financial health check. If your discretionary spending seems high, look at previous spending amounts. For instance, maybe you spent $500 last year on extracurricular activities for your children, like lacrosse equipment or camping trips. Instead of automatically including the same amounts in your budget, use past spending as a jumping-off point to decide if the prior amounts were reasonable. If they were too high, work on strategies to adjust your expenses.

Of course, there are times when you'll want to save more—like when you're planning a wedding or looking for a new house. And there may be times when you may need to temporarily strike a different balance between spending and saving. As circumstances change, you should look over your budget and make sure it's in step with your current financial needs and future goals.

Tools to improve your budget

In a digital world, there are more personal finance tools available than ever. Here are some popular ones to consider.

Mobile apps

Often free and easy to use, personal finance apps like Mint, Goodbudget and EveryDollar can help you create a budget. They also allow you to track spending on the go, plan for future purchases and resist impulsive shopping.

Budget calculators

A household budget calculator is a useful budgeting tool that can help you stay on top of recurring bills and payments. Budget calculators can also provide a visual picture of your cash flow and allow you to adjust certain amounts up or down to better manage your money.

Spreadsheets

Detailed budgeting spreadsheets let you personalize your record-keeping to a degree that isn't always possible in a ready-made template. Specifically, they can help you analyze your budget and run through any changes in income or spending to see how they'll affect your finances. Some budget-related functionalities in a program like Microsoft Excel, for example, can help you with:

• Calculations. Try the =Sum() function to help you tally your monthly income or expenses in a category, and use the =Average() function to calculate a monthly average in each category so you know exactly where you're spending your money.
• Organizational tools. Use tabs at the bottom to create separate sheets for each month of the year, add a summary sheet to track year-to-date totals, and color code numbers to help you highlight things like overspending and unpaid bills.
• Charts. Use line charts to graph changes in your income or spending habits, area charts to demonstrate how your spending or saving changes as a percentage of income, and pie charts to get a picture of total spending divided into categories.

Sticking to a budget

Once you've established a budget, the next challenge is sticking to it. Keep yourself on track by signing up for mobile banking features like automatic bill pay for major budget items like utilities and your mortgage. If you'd rather not automate payments, you can sign up for notifications about upcoming bills to remind you to pay them before their due date.

Set aside time each month to look over your spending and make sure you're meeting your goals. If the spending amount—including necessary expenses, savings and discretionary spending—is lower than your monthly income, you have a balanced budget that's ready to implement. But if you notice that a spending category is higher than planned, you may need to find new ways to save money and stay on track.

Budgeting for big expenses

As you become more comfortable with budgeting, you can set some larger goals and work toward achieving them. If one of your goals is a large purchase like a vacation or home renovation, you'll need to sit down and find a way to fit the amount into your budget. This often means cutting back on discretionary spending and trying to save more over a set period of time. You may also want to devote larger chunks of money—like an annual bonus or wedding gifts—toward a large purchase by setting it aside immediately before you're tempted to spend it.

When budgeting for large items, it's also worth looking at your essential expenses. You can't cut these out completely, but there may be ways you can save money.

• To save on gas, consider carpooling or working remotely if possible.
• Transfer high-interest credit card balances to a new card with lower interest.
• Negotiate with your internet or cell phone provider for better rates, or cut down on streaming data.
• Make a grocery list to resist impulse buys, and pay with cash so you can more easily stick to only what's on the list.
• To free up additional income, determine whether a mortgage refinance could help with consolidating outstanding debt while lowering payments or keeping them the same.

Your budget is a living document

The only thing you can be certain about is change, and the same goes for your budget. When financial circumstances change—like increased income due to a raise or added expenses when starting a family—you'll need to make spending or savings adjustments.

Keep moving forward financially by revisiting your budget every month, and make sure you're on track toward achieving your goals. It's also important to continue educating yourself on how to create a budget. It may take some time to find the strategies, methods and tools that work best for you.