How to Create a Budget

No matter how you feel about budgeting right now, no matter what money goals you have, and no matter your income—you can make (and keep!) a budget in just five steps. Seriously! 

But first: Before you start, open up your online bank account or pull out those hardcopy bank statements for the past couple of months. Trust us—it makes the process way easier when you can look back at your numbers!

Step 1: List Your Income

Income is any money you plan to get during that month.

Create separate income budget lines for every paycheck you (and your spouse, if you’re married) make, plus anything extra coming in (like a side hustle).

Here's an example:

His Paycheck 1: $1,500
Her Paycheck 1: $1,500
His Paycheck 2: $1,500
Her Paycheck 2: $1,500
Side Hustle: $500
Total Income: $6,500

If you’ve got an irregular income, take a look at what you’ve made the last few months and list the lowest amount as this month’s planned income budget line. You can adjust later in the month if you make more and add that extra money to your money goal or another budget line. Check out our Irregular Income Planning form for more help here!

Step 2: List Your Expenses

Now that you’ve planned for the money coming in, you can plan for the money going out. It’s time to list your expenses! (Yep, this is when that bank account or statement gets super helpful.)

Pro tip: Before you put the things you pay for every month into your budget, set aside money for giving. We believe in 10% of your income here and always having a spirit of generosity

Also, if you don’t have an emergency fund yet, you need to make saving one of your priorities. We talk about this more in the How to Save for the Future section!

What's next?

Cover your Four Walls. That’s food, utilities, shelter and transportation. Make a budget category for each of these, and you can create budget lines underneath.

Think of a budget category as a folder and the lines as the files inside it. Or the category is like a playlist, and the lines are like the songs. Or . . . okay, you get it.

For example, food is a budget category, and groceries is a budget line that goes under it!

Speaking of which—that grocery budget line is super hard to guess at first, so just start with a really good estimate based on your past spending. You’ll learn better what you actually need to budget after a few months.

Then, list all other monthly expenses. 

  • Start with the essentials: We’re talking about insurance, debt, childcare, etc. 
  • Then work in a miscellaneous line and any nonessentials like personal spending (or fun money) and entertainment.

Okay, that was a lot. To recap, here are those common expenses. We’ve got things in here that might not apply to you, but it should give you a good idea of what your budget categories might look like!

  • Giving
  • Savings
  • Food
  • Utilities
  • Shelter/Housing
  • Transportation
  • Insurance
  • Debt
  • Childcare
  • Miscellaneous
  • Fun Money
  • Entertainment

Quick callout: If you’re working to save money, get out of debt, or some other money goal, you’ll get there way quicker if you cut back on the nonessential spending. If you don’t know which money goal to go after first, check out the 7 Baby Steps.

Step 3: Subtract Expenses From Income

Subtract all your expenses from your income. This number should equal zero. We call this a zero-based budget.

Quick callout: A zero-based budget doesn’t mean you let your bank account reach zero. Leave a little buffer in there of about $100–300. 

It also doesn’t mean you blow all your money. And here’s the reason we love this method: Zero-based budgeting just means you give every dollar a job to do—spending, giving, saving or paying off debt. It’s all accounted for and given a purpose.

What if you subtract your expenses from your income and you’ve got money left over? Don’t leave it there. You’ll end up mindlessly spending it here and there. Get those dollars to work by putting any “extra” money toward your current money goal.

What if you end up with a negative number? You just need to cut expenses until your income minus your expenses equals zero. (Hint: Start with those eating out and entertainment budget lines.) 

You can also get a side hustle or work overtime. Just remember—if you increase your income, don’t increase your spending! The extra cash should cover your budgeted expenses.

P.S. If the math stresses you out a little, try EveryDollar. Our free budgeting app is made for this zero-based budgeting stuff.

Okay, so that’s it for setting up your budget. The next two steps are all about sticking with it.

Monthly budget percentages and averages

Step 4: Track Your Expenses (All Month Long)

Tracking your transactions means you account for everything that happens with your money all month long. 

This is such a huge key to winning with budgeting (and money) that we have a whole section about why it’s important.

Step 5: Make a New Budget Before the Month Begins

While your budget shouldn’t change too much from month to month, the fact is, no two months are exactly the same. That’s why you create a new budget every single month—before the month begins.

Start by copying over this month’s budget to the next. Then make changes for anything new that’s coming.

Here are some examples of month-specific expenses to prep for:

  • Celebrations, like birthdays and anniversaries

  • Holidays, like Christmas and National Donut Day

  • Seasonal purchases, like back-to-school shopping

  • Semiannual expenses, like insurance premiums

  • Annual expenses, like some memberships

Here’s one way to wrangle these changing expenses into your budget:

  • Create a budget category called something like Month-Specific Stuff or Alternating Expenses (or Discretionary if you like fancy words).

  • Then add whatever lines you need for that month and delete the ones from last month you no longer need.

Where does the money come from? You can cut back spending somewhere else and move that money over to this category or crank up your income for the month. (Time for an extra freelance gig!)

Quick callout: Listen. It takes people about three months to really get the hang of budgeting, so give yourself some grace and keep working on it. The benefits of budgeting are worth it! 

P.S. Having an accountability partner really helps during those first three months (and the whole journey, tbh).

Quick-Start Budget

Want to start on paper first? We got you.

Free EveryDollar App

Keeping up with your budget is way easier with EveryDollar! You can get started with your free budget today.