6 Steps to Create the Perfect Budget

The key to creating a budget is finding what works to help you manage your money. Many budgeting tools exist, but you need to find what works for you. Managing your money is about choices – choosing how to earn, spend, save, and keep track of your money. A personalized, realistic budget can help you set priorities, direct spending, and manage your cash flow. While budgeting tools and practices vary from person to person, there are generally six steps that most people take to create a budget. Keep in mind, it is really more of an art than a science.

Step 1: Explore your goals and values

What’s important to you? What is your top financial or life goal? If you need some help, identifying your goals, use this worksheet. Your goals will help you create a budget that affords your current obligations, activities you enjoy, and future plans.

Step 2: Gather and track your financial information

You need to understand what is happening now with your money, including income, expenses, and savings. What is coming in? What’s going out? What’s stored away? Most people know their regular earnings and expenses, but may not have a clear picture of irregular or day-to-day expenditures. To get a better sense of your cash flow, carefully track your income and expenses for at least 30 days.

Determining your income – the money you and your family receive on a regular basis from work, investments, public benefits, or business sales – might be relatively easy. For budgeting purposes, use your net (or take-home) monthly income after taxes and other payroll deductions have been taken out. Collect information related to income, such as paystubs, that show how much you bring in and how often from all sources. Calculate your total. If you prefer, use a worksheet to make sure you’re capturing everything.

Gathering expenses – anything you spend your money on – can be more involved. You have some expenses that are fixed and regular, such as rent, and others that change day-to-day, such as groceries or entertainment. To closely track all expenses for at least 30 days, you can gather monthly bills, collect receipts, use a notebook, use a worksheet, use an online budgeting tool, and/or review your bank and credit card statements. Choose the method that works best for you. For irregular, expected expenses, such as car maintenance, an insurance premium, or car registration, gather past information or make estimates. After 30 days, gather all of your expense records (bills, receipts, bank statements, notebooks), categorize (housing expenses, food expenses), and then add up your total monthly expenses.

Also, note how much you already have set aside by checking your savings balance.

Step 3: Assess your current financial situation

What’s your bottom line? After you have all of your financial information in order, subtract your expenses from your monthly income to see what is left over (also known as your bottom line) to spend or save. If it’s helpful, use a worksheet. In some cases, your bottom line might be negative, meaning that you are spending more than your current income. Consider what immediate changes you can make to bring in more, spend less, or do both.

If you have some money left over each month, consider whether it’s enough to cover essentials, money set aside for emergencies, your financial goals, and expenses that are important for you, such as fitness or entertainment. If not (and that is usually the case), you’ll have to make some changes to current spending, saving, and earning habits. Nearly always, reaching financial goals requires us to change our financial habits. How much exactly do you need to set aside each month to be on track with your current situation and future plans?

Step 4: Make changes to how you manage your money

From your assessment, you have a dollar amount in mind of how much you need to adjust your current financial habits. To change your bottom line, there are only three changes you can make: increase your income, spend less, or do both. Bringing in more income could include turning a hobby into a business or second job, maximizing your tax benefits, accessing public benefits, or selling items you do not use.

For reducing expenses, move from general to specific changes. First, note your essentials and priorities. You can use a tool to prioritize. Then, think about your least important expenses. What costs too much? What could you change? Spend some time looking at the big picture. Brainstorm, and get creative. After that, go through specific spending categories, such as transportation or insurance, and consider changes. Could you carpool or take public transportation more often to save on gas? Could you shop around for a lower cost insurance plan? Keep drilling down until your expenses are where you need them to be. Then integrate the changes into your budget.

Step 5: Create your budget

By now, you’ve done all of the hard work. You have gathered your income and expenses, and you have made changes to habits. It’s time to commit to your new plan by putting it in writing. To make your written budget, you can use a worksheet, an app, a spreadsheet, or a notebook. It is important that you find a tool that works for you to map out your new plan for saving and spending.

Step 6: Follow, track, and adjust as needed

Follow your plan as best you can and continue to track what you actually spend using a record-keeping system that works for you. At least every month, reconcile your planned budget versus your actual expenses. Your findings may help guide you to adjust your budget or your spending habits. Remember, a budget is your plan to manage your money in ways that work for you!


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