The basics of creating a budget are pretty simple but where do you start? Don’t worry, the following updated blog post explains how to create a personal budget in 6 easy steps.

If you are reading this perhaps you are like most of us and forget the stick to it part or maybe you struggle with where to start. Either way, it’s important to know how you spend money. A good budget is designed to help you do just that and reach your financial goals.

Are you starting your first job after college and want to figure out what your paycheck can cover? Or are you trying to pay down credit card debt?

Everyone’s budgeting goals are different. Whether your goal is to reduce your debt or finance a remodeling project, it should be the core of your budget. As you pay attention to income and expenses, you’ll aim towards that goal.

What is a Personal Budget and Why is it Important?

First, let’s define what a budget really is. A personal budget allows an individual the ability to organize and document their income received and compare it against their monthly spending. And let’s say spending includes all debt, living expenses (needs), and discretionary spending (wants).

Think of your personal budget as a basic financial plan. This is important as everyone needs some sort of financial plan to help guide them to make more confident decisions on major life events in addition to reducing the overall financial stress around these decisions.

The only negative to a personal budget is the time and commitment needed to create, maintain, and make any necessary adjustments as needed. However, this is a small price to pay given the reward of personal financial knowledge and confidence.

How to Create a Personal Budget in Six Steps

Step One: Organize Your Finances

Every journey starts with a first step. In this case, your first step is to organize your financial world to get some visibility.

Spending

Organizing is also your first step because you are creating a starting point to determine how much money you pay out each month as opposed to how much money you take home. Ultimately your main goal should be to end each month with more money than you paid out.

Let’s breakdown spending into the following categories:

  • Monthly Bills: This is money you pay out every month for a service, a past purchase, and other debt (example: student loan debt, mortgage, etc.).
  • Annual or Quarterly Bills: These are costs that are paid out once or multiple times a year such as a renter’s insurance policy or property taxes.
  • Savings: Hopefully you are setting aside some money each month for general savings, an emergency fund, or for your retirement.
  • One-off Purchases: Get ready to go through all those receipts you’ve been hanging on to because this is the more difficult task is to account for any discretionary spending. This means what did you spending on food, entertainment, clothes, etc. during a particular month. The best way to review your one-off purchases is to skip the receipts and scrutinize your monthly checking account in terms of money spent and cash withdrawn.

And if you really want to shine like a diamond, spend your first month keeping notes of everything you spend money for 30 days. This will now offer insight into what you actually spend your money on.

Income

As for your income, this is also the time to organize and identify any sources of revenue you may have. Chances are you only have your salary and/or your significant other’s if you’re married. However, if you have additional income like a second job or a side hustle, you would also consider this as income.

Remember, when reviewing your income for budgeting purposes, only focus on your take-home pay or net income – meaning, it’s already been taxed.

Step Two: Create a Personal Budget Template

Now that you have everything organized, it’s time to create your personal budget. You can go old school and write your budget down on paper or in a ledger, but we recommend that you use an electronic spreadsheet like Google Sheets (free), Excel, or Numbers. Not only does an electronic spreadsheet easily adapt as your budgeting needs change, but it also offers the ability to include automated formulas to do all the hard work.

To assist you with creating a personal budget spreadsheet, we’ve included a simple personal budget example below that you can copy, modify, and use.

However, if you want to create your own budget template, then we recommend the following included in your budget:

Keep It Simple

A personal budget should have two sections – one for expenses and one for income.

Break Down Your Expenses into Manageable Categories

In the first step, we asked you to review and organize all your expenses. While you were doing this, you probably started to realize that some expenses share similarities. For example, your electric and water bills could all be included in a category called Utilities while expenses from a Saturday date night and a monthly streaming service subscription could be grouped together and called Entertainment.

Breakdown Your Spreadsheet into Twelve Months

It sounds like a lot of work, but if you are serious about operating a successful budget, you need this type of visibility. Having a 12-month view offers you the ability to see trends and make adjustments to your budget as needed.

Spreadsheet Formulas to Calculate The Difference Between Income and Expenses

More on this in Step Five. =)

Personal Budget Template

how to create a budget example
Make A Copy of This Budget Template

Step Three: Log Your Monthly Income

Now that you’ve organized your finances and have a personal budget spreadsheet, it’s time to begin using your budget. In this next step, simply log your income in the appropriate spreadsheet cell(s) for the month.

Step Four: Log Your Monthly Expenses

If you’ve broken your expenses into categories, this is the time to add up each expense by category and log it in the appropriate spreadsheet cell for the month. Do this for all of your expenses for the month.

Step Five: Compare Expenses and Income

This is the step where you start getting a handle on your expenses. This is also the step where a basic knowledge of electronic spreadsheet formulas is needed.

Tip: Did we mention our pre-made template (see above) already has all of the necessary formulas baked in. But, if you want to create your own budget and are a little rusty in your formulas, check out this cheat sheet for Google Sheets.

To complete this step, add up all of the expenses for a particular month, add up all of the income for the same month, and the difference is your current financial situation for that month.

  • If you have a negative number, this is not good and we hope you have money set aside in savings to pay the difference. Regardless, if you experience one or more negative numbers in consecutive months, we highly recommend reviewing your monthly expenses to find costs to cut.
  • If you have a positive number, that’s a good thing. You now have money left over for savings, debt, or next months’ bills.

Step Six: Keep Your Personal Budget Alive and Thrive

Now that you know how to create and use a budget, this is a great time to go over some budgeting best practices.

  • Consistency: When you first begin to use your budget, try to stick with performing it at the same time every month. As you probably know, bills and expenses never take a vacation, so don’t even try updating your budget throughout the month. Rather, devout some time each month to your budget. For example, you may use the first Saturday of every month to complete and review the previous month’s budget.
  • Identify Trends: After you’ve successfully used your budget for 3-4 months, take some time to review what your financial world looks since you should have some clear visibility of your expenses at this point. Meaning, if you are constantly over budget each month, you may need to review your expenses and determine which costs are needs and others are wants (or like-to-haves). Once you identify your wants, focus on these as the first expenses to cut if you have to. Trust me, you will be amazed at how much money is spent on wants as opposed to basic needs – which is fine as long as you have the income to support it.
  • Quarterly Reviews: Like performing maintenance on student loan debt, you should get in the habit of performing a budget review every 3 months. Again, this allows for the ability to observe trends and decide on any adjustments that need to be made.

Personal Budgeting Tips

Below are some tips to help you reach your financial goals and feel better managing your money.

Track Your Spending First

A great first step is to monitor your spending for two full weeks. Tracking where you spend your money will help visualize where saving is possible. One of the easiest ways to do this is simply ending each day by reviewing all your receipts and logging what you spent your money and how much.

Set Realistic Goals for Your Budget

You may have hopes of sending 50% of your take-home pay to paying off your debt. But that aggressive strategy may impact how you pay your bills each month! It’s great that you realize the importance of eliminating debt, but don’t make it impossible to achieve.

The sacrifices you may have to make may outweigh the benefits of being debt-free so quickly. Instead, focus on what is realistic and achievable.

Be Patient

Scientists have studied habit formation for more than a century. Research suggests that it takes at least 66 days to actualize a positive habit.

Sticking to a budget or adding new strategies to reduce spending is not going to be easy and it won’t happen overnight.

Give yourself time to think about your financial goals. Then understand your expenses, and investigate new strategies that can reinforce savings habits.

Budget for Unexpected Expenses

There will be very few, if any, months where your budget will turn out exactly to the penny as you had planned. The longer you stick to a budget, the easier it will be for you to plan in advance for expenditures.

You’ll also get better at making modifications if your income increases or decreases.

Expect to feel obligated to contribute a gift or attend an out-of-town event. You’ll also have to repair an appliance or replace a broken phone or experience a health emergency. Of course, there is the possibility you may inherit, find, earn, or win a big bonus of cash! But it is inevitable there will be unexpected expenses, emergencies, and unavoidable reasons to go over budget.

If you don’t have an emergency fund, make building a healthy one a financial goal.

Use the 3-Tier Emergency Fund Goal System

As you create an emergency fund, we recommend a 3-tier system. Basically it’s a 3-step process to save money for a rainy day:

Tier-1 save $500.00

Tier-2 save $1000.00

Tier-3 save $3000.00

If you have an emergency and use your funds, start the next month saving toward your next tier. If you max out the tiers up your game to 1, 3, and 6 months living expenses.

If you don’t have an emergency fund, check out our article that explains why an emergency fund is important and how to create one in 3 easy steps.

Remember Yearly Expenses

You could go 11 months on a budget thinking everything was working fine. Then at the end of the year, get hit with a yearly expense you had forgotten.

Such things as car registration or license tag fees, taxes on freelance work, insurance premiums, membership fees, or subscriptions may occur infrequently enough that you forgot you had to pay them.

It may take a year for you to include every expense to fine-tune your budget.

A Healthy Budget Cuts Out Impulse Spending

Have you ever filled your online shopping cart and then abandoned it? Online window-shopping is an actual trick people use for making spending decisions.

It doesn’t cost anything to look and sometimes you get emailed a coupon the next day! Doing this allows you more time to think about whether or not you really need to buy those items. For actual in-person spending, don’t feel pressured to make a big financial decision in a few minutes. Remember, always make sure a purchase aligns with your financial goals.

Hopefully, this article has helped you create a simple budget to help you stick to a monthly budget. To learn more about specific personal budget types, we recommend you check out our article The Most Popular Budget Types Explained to learn more.

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