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A good budget is the centerpiece of a solid financial plan. It’s how people living paycheck to paycheck can find their way to a more solid financial future. It’s how anyone can cope with changing living expenses or fluctuating income. And it’s definitely the best way to wrangle overspending. 

If you’re creating your first budget, there are some basics you need to know. By the end of this article, you’ll not only know how to manage a budget, but you’ll also know how to spend and save money like a pro. 

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Why Use a Monthly Budget?

A budget is about telling your money what to do. All the money that comes into your life can and should have a purpose. You tell your money what to do by planning and tracking your income, saving, and spending.

There are many benefits to keeping a budget:

  • A greater sense of control and self-possession
  • Better spending habits
  • Less financial anxiety and stress
  • Higher likelihood of reaching financial goals

I’m low-income. Do I need a budget?

If you are low-income, you need a budget. Budgeting in a system that works for you is the best way to make every dollar stretch. The better you manage your money today, the easier it will be in the future. Especially when things go wrong. 

I make plenty of money. Do I need a budget?

There is no income too high for a budget. While you may be less vulnerable to surprise bills, you’re still more vulnerable without a budget. And you’re more likely to make costly mistakes through little problems. Fees from overdrawing your bank account or making a late payment add up over time.

Those little things add up over a lifetime. 

How to Create a Budget in 8 Easy Steps

Step 1: Use a System

The first step is to decide on a system to track your spending. There are many ways to implement a budget. Some popular ways to budget include:

Zero-Based Method

With the Zero-Based method, every dollar is assigned a task. Nothing goes unaccounted for, which makes it very useful. But it also takes more time. Some apps can help automate this method, but many people use a spreadsheet. 

Envelope Method

AKA the Envelope System, this method separates your money based on spending categories. You give each category a spending limit. The limits can be based on monthly or weekly budgeting. Cash covering the spending limit is placed in an envelope. When it comes time to spend money on that category, you spend directly from its envelope.

The benefit here is that you can’t overspend. If you only bring a certain amount with you to the grocery store, you can’t spend more than what you budgeted. At least not without going all the way home to get more money. 

50/30/20 Method

This is a popular and quick method. The idea is that you divide your income into three categories, with a specific portion of your income going into each:

  • 50 percent goes to your needs
  • 30 percent goes to your wants
  • 20 percent goes to savings or debt repayment

Needs are the things you can’t live without. Your rent, cell phone, and groceries are needs. Wants are the things that make life better but aren’t critical to survival. Your subscriptions, apparel shopping, and going out to eat are wants. 

The benefit of this method is its simplicity. 

Step 2: Decide on Tracking

There are many budgeting tools to track your spending, such as:

  • Using a register or journal
  • Using an app on your phone
  • Using a spreadsheet

Whatever you decide, make sure it works for you. Some people do better with low-tech solutions. Some people do best with automation. Knowing which system is right for you takes self-knowledge and at least a little trial and error.

Step 3: Determine Net Monthly Income

You’ll need to know how much money you’re working with every month. If your take-home pay is the same every pay period, then add together what you make in one month based on your paystub. If you have irregular income, calculate the average of your pay over the last three months.

Don’t forget to add other sources of income like: 

  • Side gig money
  • Child support
  • Alimony

Everything should be counted even if the funds are already earmarked. 

Step 4: Uncover Current Monthly Expenses

Now’s the time to get a clear picture of your spending habits. Gather your bank statements from the last three months. Grab your credit card statements as well if you use credit cards for purchasing. Review and record your recent transactions into your system. 

This part may seem tedious, but it is more than worth it. It will help you more accurately designate how much money each part of your budget needs. More importantly, you’ll be able to see your strengths and weaknesses. Maybe you’re very thrifty when it comes to housing costs, but you tend to blow your money going out on the weekend. 

This exercise will make spending habits clear. 

Step 5: Set Your Goals

There are a few essential financial goals you should consider when planning. Here are our recommendations for the goals you should consider.

Emergency Fund

If you don’t have an emergency fund of at least $1,000, that should be your absolute first savings goal. Ideally, three to six months of your income should be in an accessible place like a savings account. This is to help you pay for an unexpected expense or cover a sudden loss of income. 

“Bad Debt” Reduction

Bad debt is anything that negatively affects your credit score. This includes:

  • Credit card balances
  • Bills in collections
  • Car loan
  • High-interest lending

As you pay off your balances, you guarantee a return on your money. That’s because each payment reduces the amount of interest you’re charged over the life of the loan. 

Once this debt is eliminated, you’ll free that money for other goals. Just think of what you can do without a car payment.

“Good Debt” Reduction

Things like your student loans and your mortgage are often called “good debt.” The reason is that these debt instruments are typically low-interest. They also build your credit, so long as you pay it on time. However, “good debt” still comes with an interest rate. Plus, you’re paying interest on a larger balance than the average credit card. That means that even with low interest, you’ll pay thousands more over the life of the loan. 

How much more? Let’s say you take out a 30-year mortgage of $100,000 at 3.5 percent fixed interest. If you pay the minimum payment, you’ll pay about $62,000 in interest by the end of the loan. 

That same mortgage paid off in ten years only costs $20,000 in interest. 

Retirement Savings

Whether you have an employer-matching program or you have an IRA, you need to be saving for retirement. Be sure you work this important piece into your budget. All the better if you can make your savings automated. 

Saving for a First Home Purchase

Purchasing your first home is a substantial financial milestone. But you’ll need to save for a down payment, taxes, fees, and moving expenses. Making some small changes to your budget can help you save even faster. 

Step 6: Make Adjustments 

Once you know your financial goals, you can adjust your budget and spending to help you reach them. The basic rule of budgeting is to spend less than what you make. The less you spend, the more money you can devote to your financial goals. 

If you’re looking for ways to spend less and save money faster, be sure to read 47 Ways to Save Money

Step 7: Keep Track

If there was one habit that could change your financial life, it would be to track your spending. Honestly, it’s the number one way to become a better spender. You’d be better off tracking expenses without a budget than budgeting without tracking expenses.

Whether you use a handwritten register or an automated app, be sure you track everything. Review at least weekly, but for those on a very tight budget, a daily review is best. 

Step 8: Evaluate and Adjust

Budgets aren’t exactly “set it and forget it.” Incomes, expenses, and priorities change. Your budget should change with you. Each evaluation and adjustment allows you to become a better saver and a better spender.

Budgeting Tips to Go Bulletproof

We’ll be the first to admit that budgeting and sticking to a budget is not easy. However, there are some tips to make things more manageable and more efficient.

Be Honest 

You don’t have to tell anyone else, but you should be able to tell yourself the ugly truth. Whatever the problem is, you need to face it. Maybe that means admitting you need to learn more about personal finance. Perhaps that means acknowledging your credit card debt is making your life difficult. 

Accepting an ugly truth isn’t fun. But if you know you have a problem, you can focus on solving that problem instead of ignoring it as it grows worse.

Be Flexible

This is a process, not a one-time solution. Things will change for better and worse. Everyone experiences windfalls and roadblocks. Having a flexible mindset makes it easier to deal with problems and take advantage of opportunities.

Staying flexible is easier when you keep emergency funds on hand, and when you’re tracking your spending.

What if I use cash?

You can still budget yourself even if you’re a cash-only household. If you use cash, you may not have many records of your spending. That’s okay. Start tracking your spending now and try out the envelope method to organize your money.

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I’m getting…emotional about this.

Yeah, that happens. (Especially during step four!) We would all like to believe that money is just facts and figures. But it isn’t.

How you feel about money is connected to:

  • Your past and how you feel about your future
  • Your relationship with your spouse/parent/child
  • Your relationship with yourself
  • Your relationship with your community

In short, it’s a complicated subject. Be gentle with yourself. You may find it helpful to free-write about your experience. Some may find using a journal helps them change their spending habits.  

Find a Group for Accountability and Support

Changing habits are difficult even when the reward is financial freedom. To help you stay on track, consider joining a support group. You can find like-minded people on Facebook, Reddit, and other social networks. In some cases, you can even speak to others anonymously. 


The exact method you chose to organize and track expenses is up to you. The important thing here is that you pay attention to your spending. The more engaged you are, the more likely you’ll find yourself with leftover money at the end of the month. 

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Updated September 17, 2020

J.J. Starr is a health and finance copywriter who enjoys helping readers find the information they need. In addition to her background in banking and financial advising, she is also a poet with an MFA from New York University. She lives in Amherst, Massachusetts. You can learn more at jjstarrwrites.com.