How to Create a Budget: 6 Tips

How do you stop living paycheck to paycheck and start saving for the future? The only answer is to create (and stick to!) a solid budget.

In this blog, we share with you the fundamentals of personal finance budgeting and our thoughts on how to budget money on low income. Ready? Let’s get right into it.

KEY TAKEAWAYS

• Track every source of income and meticulously log all spending, including small purchases.
• Set specific and realistic financial goals with timelines to keep your budget focused and effective.
• Choose a budgeting method that suits your lifestyle. Options like the 50/30/20 rule, envelope system, or zero-based budgeting can help you manage finances effectively.
• Regularly review and adjust your budget. Life changes and unexpected expenses require frequent budget updates to stay on track.
• Apps and spreadsheets can simplify tracking expenses, automating savings, and maintaining control over your finances.

What Is a Personal Budget?

A budget is essentially a plan that outlines expected income and expenditures over a period or a specific project. A company may have a budget for a year, and so may a production studio for a movie. However, you, as an individual, can also have your personal finance budget.

A personal budget charts your financial “ins and outs,” giving you a clear picture of where you stand financially and helping you make informed decisions about saving, spending, and tackling debt. It helps you see exactly how much money is coming and where it’s going so you can prioritize your goals. Over time, maintaining a personal budget encourages healthier financial habits and reduces money-related stress.

1. Understand Your Income

Before you can effectively allocate money to savings, debt, or everyday expenses, you need a clear view of your total earnings. This goes beyond your monthly salary. Include side hustle payments, freelance gigs, government benefits, or any other passive income you have. Once you have a precise figure, you’ll be able to spot how much is truly available for goals like building an emergency fund or tackling debt.

2. Track Your Expenses

Tracking your spending is the engine of any successful budget, as it reveals where your money goes each month. Start by listing out all regular bills and recurring expenses, such as rent or mortgage, utilities, phone bill, and insurance, and then factor in variable costs like groceries, fuel, and entertainment.

Be very meticulous and include seemingly small items, such as daily coffees or a quick lunch out, since these can add up over time. Consistently logging in every expense will help you identify how much money do you spend and where you can cut back and free up money for more pressing priorities.

3. Set Financial Goals

What should be considered when setting a budget? Be specific about the amount you want to save, the timeline you’re saving for, and the steps you’ll take to achieve your financial goal. For instance, you might want to tackle the last remaining $2,000 of your debts in six months by dining out less.

Concrete targets keep you focused because, without them, it’s easy to drift back into old spending habits or let everyday expenses derail your progress. By deciding what’s your priority, you’ll know exactly where to direct your hard-earned cash.

4. Create Your Budget

Once you understand how to budget your income, expenses, and financial goals, it’s time to put it all on paper and create your budget. Below are three common budget plans. What is the best way to create a budget, and which of the following strategies is a way to balance expenses and savings? Read on to find out.

50/30/20 Budget

One of the recommended budget percentage breakdown approaches is the 50/30/20 rule. This technique suggests dividing your income into three categories:

• 50% for needs, such as housing, groceries, utilities, and transportation.
• 30% for wants, such as dining out, hobbies, and entertainment.
• 20% for savings or debt, including emergency funds, loan repayments, etc.

Because it sets clear personal budget percentages, the 50/30/20 rule makes it easy to spot where you might be overspending. You can even use a 50/30/20 calculator to quickly figure out how much to allocate toward each category. For instance, how much of your income should go to bills? If your “needs” section starts creeping over 50%, this can be a trigger warning that you might need to cut some costs, like eating out less or freezing some subscriptions. Meanwhile, a separate category for just “wants” helps you enjoy life guilt-free while still ensuring that savings and debt are prioritized.

However, the downside of this rule is that it may not adapt well to high-cost-of-living areas, where needs may consume more than 50% of income. Therefore, you might need to adjust your personal budget percentages to account for higher living costs. It may also not be a good fit for those who do not have a consistent monthly income.

Envelope Budget

With the envelope budget system, you first determine spending categories, such as food budget, transportation, vacation, and so on, and then place the designated amount of cash for each category into separate envelopes. Whenever you need to pay for something in a specific department, you take from the corresponding envelope. If an envelope runs out, you stop spending in that category until the next budgeting cycle.

The downside of this method is that it requires consistent withdrawal of cash unless you adapt the idea to digital banking by creating separate “budget buckets” or sub-accounts. It’s also necessary that you don’t shuffle between money categories. Otherwise, your budget will lose its meaning.

Zero-based Budget

The zero-based budget assumes that your total planned spending must equal your income for the month. It doesn’t rely on a set budget percentage for each category but assigns every single dollar of your income a “job” before the month begins, starting from utility bills and finishing with savings. Then, you allocate the money to each category until your budget zeroes out, meaning there’s no unallocated money left over.

This method offers maximum transparency and control over your money. You’ll know exactly how much is dedicated to each expense. The downside is that it takes time and effort to set up and maintain the budget, especially if your expenses fluctuate. It also requires diligent tracking and frequent adjustments to stay accurate.

5. Adjust Your Budget

Of course, not every month is going to be consistent regardless of your salary. Some months may require costly car repairs, while others may leave you with a surprise surplus when nothing out of the ordinary happens. The key to how to budget during these times is to review your budget regularly, ideally once a month, and compare your actual expenses with your planned ones.

If you consistently overspend in one area, try tweaking other categories to balance it out and look for ways to cut those costs. Likewise, if you end up with extra cash, assign it to debt repayment or boost your emergency fund rather than letting it slip through your fingers.

6. Use Budgeting Tools and Resources

From apps like YNAB, Mint, and Money Dashboard to simple spreadsheet templates in Google Sheets, you have plenty of options to track expenses, categorize spending, and automate savings. Some tools even let you set bill reminders and create custom alerts to help you avoid late fees.

These tools simplify the day-to-day work of budgeting and give you a crystal-clear view of your spending habits and how to budget money. This way, you can quickly spot areas where you can save more and stay on course with your financial goals.

Common Budgeting Mistakes to Avoid

It’s easy to slip up when you’re managing your finances, and a few simple missteps can derail even the best-laid plans. By being aware of potential pitfalls, you’ll be better equipped to keep your budget on track and achieve your financial goals. Here are the most common mistakes to watch out for when budgeting:

• Overlooking irregular or seasonal costs can catch you off guard and blow your monthly budget if you don’t plan for them. Insurance premiums, car maintenance, holiday shopping, or subscription renewals can be easy to forget if they don’t happen monthly. To avoid a sudden financial crunch, anticipate these costs by adding a “seasonal expenses” category to your budget.
  
• Failing to create an emergency fund can leave you unprepared for unexpected expenses like medical bills, car repairs, or job loss. While an emergency loan can be a helpful and reliable option in urgent situations, building your own financial safety net ensures you’re better equipped to handle life’s surprises. Aim to set aside at least three to six months’ worth of essential expenses in a dedicated fund to enhance your financial security.

• Setting unrealistic goals. While ambition is great, slashing your grocery budget too aggressively or trying to pay off credit card debt in a few weeks can leave you feeling frustrated. Instead, set targets that stretch your capabilities without breaking the bank, like gradually lowering spending on luxuries or making slightly higher debt payments.

• Using credit cardsto cover daily or weekly expenses might feel like a quick fix, but high interest rates can quickly pile up, trapping you in a cycle of debt. Whenever possible, stick to a cash or debit system for variable expenses and treat credit as a last resort or a tool to be paid off in full each month.

• Ignoring small purchases when creating a budget. Frequent takeouts, coffee runs, or last-minute online orders may not seem like a big deal in isolation, but they add up surprisingly fast. Keep track of these minor expenses and factor them into your budget.

•  Ignoring to update your budget over time. Regular check-ups are needed to reflect changes in income, unexpected events, or evolving financial goals. Schedule a monthly or quarterly review to ensure your plan still aligns with your actual spending and adjust accordingly.

Think of your budget as a living guide rather than a rigid rulebook. Regularly reviewing and adjusting it – this is the core of sound budgeting advice that leads to lasting financing success.

FAQ

How Do I Prioritize Saving and Reducing Debt in My Budget?

Treat savings like a bill by automating a set percentage of your monthly income right after you get paid. Target credit cards or loans with the highest interest rates first to save money in the long run. If your “wants” category is too large, trim discretionary spending and redirect the freed-up funds towards extra loan repayments.

What Should I Do if I Overspend My Budget?

Pinpoint which category you exceeded and examine the reasons behind it. Next, see if you can offset the overage by cutting back on other areas for the rest of the month. If you consistently overspend in one category, adjust your overall budget and consider ways to manage spending triggers, such as negotiating bills, canceling unused subscriptions, or taking on a side gig.

How to Keep a Budget Without Getting Discouraged?

Approach budgeting with realistic expectations, aiming for steady progress rather than immediate perfection. Celebrate small milestones, like sticking to your meal plan for a week or reducing a credit card balance, so you stay motivated over the long term. Regularly revisit and tweak your budget as your circumstances change, and remember that occasional slip-ups are normal.