How to Create a budget in 5 Easy Steps

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It can feel a little overwhelming to create a budget for the first time. As a beginner, you’re wondering how to create a budget that actually works for your life and not just follow some template that’s meant as a one-size-fits-all solution. 

Because here’s the truth, no two budgets are alike. 

There may be similarities between one budget and another, but the owner’s lifestyle will be the driving force that gives the budget it’s unique attributes. 

Have I lost you yet? 

Don’t worry, I’m going to walk you through exactly how to create a budget that works best for you, specifically you. 

And it’s not going to take hours or feel like you’re learning a new language. 

It’s going to be simple, straightforward, and easy to stick to. 

How I Got Started with Budgeting

When my husband and I were in debt and I was reluctantly trying to create my first budget, I had a lot of anxiety with how to create the perfect budget. 

I only added what I thought should be there, which was mainly survival expenses (housing, food, utilities, insurance, etc.) and debt. It was the most restricting thing I’d ever created and I expected myself to go along with it and be perfect.

But, after 1 month of following it to a tee, I failed. 

Utterly failed. And I’m so glad I did. 

That failure helped me realize that my budget was unrealistic. I had to create a budget that actually spoke to the life I wanted to live, not make me feel like I was being punished. 

The bottom line is that your budget should reflect what you want in your life, because it’s more than just a piece of paper that tells you where your money is going every month. 

It’s a plan for how you want to spend your money, based on what you want your life to look like. 

Once you realize this, creating a budget becomes 100 times easier. 

So, now that you understand that a budget is simply just a spending plan that you can control, it makes a lot more sense.

But, how the heck do you create a budget?

how to create a budget that actually works in 5 easy steps:

Step 1- Start Where You Are

I’ve seen this time and time again, people learn how to create a budget the wrong way. They learn based on someone else’s categories and guidelines, or based on what a budget should ideally look like. 

Well, you’re going to learn how to create a budget with a different approach.

You’re going to start exactly where YOU are.

This means that before you learn how to create a budget that works for you, you need to do some research.

Don’t worry, it should only take a few minutes of your time.

Pull the last two months of your bank and credit card statements and assess your actual spending. 

Take out a piece of paper or start an excel spreadsheet and write down every category of spending that is posted on your statements and combine those expenses in numbers. 

For example, every fast food run or restaurant charge goes under “Eating Out” or “Entertainment” or “Restaurants” or whatever name you decide for that category. Then, you add up every single expense for each month and add it to the column next to that category. 

After you’ve done that with every single expense on the last two months’ statements, you’ll divide by 2, which will give you the average you spend on each category per month. 

This is what your life looks like right now, in dollars and cents. 

Look at it and let it sink in for a minute. 

Then, move on to Step 2. 

Step 2- Add Your Goals

You probably have life goals that aren’t currently reflecting on your budget. Things like an annual vacation, paying off your debt, saving for a new car, and so forth. Whatever those goals are, you should include them in your new budget. 

When you add goals to your budget, you’ve taken the idea of what you want and created a plan to achieve it, by putting money aside each month to make it happen. 

This is where your budget becomes something that excites you. You begin to see what’s possible with your income, what you would rather spend your money on and what you can probably cut back on. 

It’s when you realize this, that you’re able to refine your budget into the exact plan that fits your life, which makes it easier to stick to and ultimately worth your time. 

Step 3- Adjust Your Numbers

You’ll notice that when you added your goals, your budget changed. It’s likely that your income can’t cover all of your budget totals right now. 

So, it’s time to start adjusting your numbers. 

Go through each expense category (even those that are fixed, like insurance, cell phone plan, internet, etc.) and start reducing them. 

For variable categories like food, eating out, and entertainment, start reducing them by at least 25%. 

For fixed categories, like internet, subscriptions, insurance, etc., start shopping around for better prices. Negotiate with your current providers to reduce your bill.

You may be surprised how many bills you can reduce just by contacting your provider and having a 5-minute conversation. 

Step 4- Get to Zero

Ultimately, the goal of a budget is to get to zero. What that means is that your income minus your expenses should equal zero at the end of the month. 

This method is called a zero-based budget.

A zero-based budget is highly effective in creating a budget plan that directs every dollar to good use. 

When you’ve directed every dollar of your income and assigned it to a specific category, you’ve taken full control of where your money goes each month. 

This is a major step in controlling your finances and being proactive with your money.

Step 5- Weekly Check-In

You’ve learned how to create a budget. One that works and you finally understand all the pieces that go into creating a good budget. 

Now what?

This step is one of the most important steps to this entire process. 

Without it, you’ll find yourself right back where you started, with a budget that doesn’t work and spending that’s once again not in control. 

Checking in with your budget is crucial. You’ll easily notice when you’ve spent too much in a category or when bad habits are creeping back in.

It gives you a mini assessment of what’s working and what isn’t, so you can course-correct for the next week. 

It keeps you on track with the spending plan you created and helps you achieve your money goals. 

So, every week (pick a day that works for you), sit down with your budget and reconcile your expenses.

Reconciling just means that you look at your week’s spending (bank statement) and deduct the totals from your budget categories. 

In just 10 minutes a week, you’ll know how much you spent and what you need to cut back on. 

You’ll stay in control, because you’ll be able to adjust your spending as you go.  

You’ll also see if your categories need to be increased or decreased for the next month based on your current needs. 

Checking in keeps you focused so that you can make the adjustments needed to keep your budget succeeding each month. 

Bonus Tip- Have Systems to Support Your Budget

Learning how to create a budget is the first major step in controlling your finances. The second step is setting up systems that help support that new budget.

In our house, our systems include things that help us lower our food and entertainment budget.

We have a weekly menu planning system, which involves grocery shopping and stockpiling when things are on sale.

We have chore checklists, so we enjoy being home more and we’re not desperate to spend money on outside activities.

And one of my favorite systems, is a snack system in the car. It keeps us from being tempted to eat out on days when we’re running errands.

We also have a monthly events calendar that lets me plan ahead for gifts and entertainment costs for that month. 

budget your events

Your systems will likely be different than ours. But, the idea is to set up systems that work for your lifestyle while still helping you stick to your budget. 

Whether you are a beginner or have created a budget in the past, this method works.

The 5-step method will teach you how to create a budget that works for any lifestyle, as long as you follow each step.

You’ll find that your efforts are more effective and you’ll create a budget that actually works for YOU. 

Your budget will give you freedom. It will support your lifestyle and help you spend within your means.

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