7 Easy Steps to Build a Budget  

7 Easy Steps to Build a Budget |Anything You Want, A Personal Finance Blog

Now that I’ve talked about how I budget and how budgets don’t have to be a scary thing, I’d like to share my thoughts on how to build a budget.

I like to budget in monthly increments because many of my recurring expenses are monthly.  A month is also both long enough to be a meaningful period of time and short enough not to be overwhelming. You could budget weekly or yearly (or do all three!), it just depends what works best for you. Here, I’ll discuss how to build a monthly budget, but the same ideas apply to any time frame.

Does everyone need a budget?

A budget might not be for everyone. Maybe you’re like BF and as long as there is money leftover in your accounts at the end of the month you’re happy. Or maybe all your spending and saving is so automated that a budget isn’t useful. I won’t say that everyone needs a budget, but I will say that I personally find it to be an incredibly useful tool. It’s also easy and (for us personal finance nerds at least) fun to make a budget. I hope you’ll agree!

Budgeting one step at a time

Step 1: Income. If a budget is a plan for how to spend money, you have to start by knowing how much money you have to spend. This is where your income comes into play. Regardless of where your income comes from (be it a job, student loans, the bank of mom and dad, investment earnings, etc.), you need to determine how much money you are working with.

Step 2: Savings and Debt Repayment. Once you know how much you’re bringing in each month, you need to determine what portion of that you want (or need) to allocate to savings or debt repayment. This gets subtracted from your income, leaving the amount you have to pay for expenses remaining.

Step 3: Fixed Expenses. With your expense “limit” in effect determined by your income less your savings and debt repayment, you now know how much you have to spend on things like housing, food, transportation, etc. Some of these expenses are likely fixed (such as rent or mortgage payments), while others are variable (such as food). Make a list of all of your fixed expenses and the amount you pay for each on a monthly basis.

Step 4: Variable Expenses. Variable expenses are harder to budget, because by definition they fluctuate. You can take a number of approaches here. One option is to work with historical averages to assign a budget number to a specific category. This might work well for something like utilities, where you have access to information about past expenses and can reasonably expect that future expenses will continue the same trend. The other option is to assign a value that you feel comfortable with. This works better for something like eating out or shopping, where you have an ability to control expenses to meet your budget.

Step 5: Contingency. Now that your expenses are laid out, it is important to account for the unexpected and build a buffer into your budget. You could put in a 5% or 10% contingency to cover overages in any category. I like to lump together several expense categories into a summary budget, giving me flexibility to over-spend in one category as long as I under-spend correspondingly in another.

Step 6: Track It.  Keep track of how you do on your budget each month (without driving yourself crazy if you go over sometimes). As you track your budget each month, you may start to notice trends that you can incorporate into future budgets (such as recurring but irregular expenses like car insurance or taxes). You may also notice trends that you don’t like (such as high spending on coffee shops or nail polish), and your budget can be a tool to help you change those behaviors.

Step 7: Re-evaluate. A budget is not a static document. Life has a way of changing as time passes and your budget should be updated periodically to reflect that. This can also be a good way to keep an eye of lifestyle inflation.

What tips do you have for building a budget?


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50 thoughts on “7 Easy Steps to Build a Budget  

  1. I think it’s really important to build in some kind of “fun money” – no matter how small the amount. That way, a budget doesn’t feel like a punishment. And you get a sense of how much you’re spending on things that aren’t needs by any stretch. Great tips!

    • You’re absolutely right, having a budget that feels like a punishment is a surefire way to fail at meeting your budget.

  2. I LOVE tracking expenses but I’ve never keep a real budget. My life is pretty unpredictable. It’s hard for me to get in a routine. I should probably buy a house and settle down. :/

    • I don’t know, sometimes unpredictable can be fun! Tracking expenses is key, and as long as you have a system that works for you then I’d say you’re in good shape!

  3. Great tips, Ali! I use to write down what I spend and then input it into an Excel spreadsheet but since I’ve discovered apps that can track your spending, I haven’t gone back. My favourite one is called Wally. I just need to input my transactions and it breaks everything down for me.

    • Thanks! I haven’t heard of Wally but I’ll have to look into it. I use Mint to track expenses; its super easy to use and much quicker than tracking by hand.

  4. Hi Ali!

    Great post. I can’t imagine not having a budget. I plan ours 1 year in advance. Because we are retired, we pull different amounts from our retirement account each month depending on the expenses for the month.

    We use a free financial management tool called Personal Capital (http://personalcapital.go2cloud.org/SHHH). Personal Capital shows us how much we are spending each month compared to budget.

    My wife likes to know how we are doing for the month so every Friday I create a report that shows how we are progressing. Here is an example of a recent one: http://www.WeBeTripping.com/PL.pdf.

    After reviewing our budget weekly, we adjust our spending accordingly.

    All the best!

    • Wow – sounds like you and your wife are really on top of things! I use Mint now, but I’ve heard great things about Personal Capital so I’ll have to explore it more. I also plan my budget about a year in advance, which is great for getting the full picture of regular and irregular expenses.

  5. Such a great list of tips! We’ve found that we’re bad at typical line item budgeting, so try to “hide” as much of our money from ourselves as possible through automated savings and investing. But we do find that tracking is super motivating — when we know we have to log an expense, we are less likely to pull the trigger on that purchase! And when we track things like our grocery spending over time, we find that we make better choices and do a better job of optimizing. Just tracking finances overall, beyond just spending, really helps us stay on track — though man, the market correction sure makes the numbers hard to look at! 🙂

    • Oh boy I am right there with you – the market correct today is pretty painful! Luckily I’m in it for the long haul.

      Sounds like a great system you have set up. It is funny that you say you are “hiding” money from yourself; I find that I do that sometimes too. If I feel like I don’t have money, I’m less likely to spend it!

    • I agree that variable expenses are the trickiest to budget, but that really makes them all the more important to budget for! Keeping track of variable expenses will help them seem a lot more manageable when they invariably come up.

  6. Enjoyed these tips, Ali. The one thing I would add, though, is that it’s easier if you start tracking your income/expenses before you start budgeting. It’s not impossible to make a budget without having historical income/expenses, but I think having 2-3 months of expenses recorded can make it much easier.

    • That is a great point. When I started budgeting I put together my budget without knowing what I was spending, which basically meant I failed miserably during my first month. Tracking spending in advance of creating a budget would definitely help create a more realistic budget from the start.

  7. We’ve never had a budget. Basically what I’ve done is, once I started tracking my expenses, I began the never-ending search for ways to cut back. I find I agree with the Frugalwoods’ method on this of questioning every single expense. Although this year I have some specific expense goals I want to hit.

    Then I force savings by automatically investing an ever-increasing amount every month (now at $3,500 a month) so that basically forces us to find more efficiencies. I look at the monthly expense numbers, but really what matters are the annual expenses since they eliminate all of the noise. That’s why I don’t put out monthly expense reports, only quarterly and annually.

    • Good that you have a system that works for you! I also like the Frugalwoods’ system, especially their idea that if you are just on “frugal autopilot” you really don’t need a budget.

  8. Great post, and way to break it down! I especially think #7 is important because life will have different chapters that require different budgets. Recognizing that it’s not static is important. 🙂 I used to budget heavily, but since setting up all automation (auto deposits to retirement accounts, and short term/long term goals, as well as bills) I’ve found it much more freeing to not have set framework! Whatever is leftover can be used for discretionary spending, or even beefing up my savings goals. Also a huge advocate for mobile apps like Mint, LevelMoney & Personal Capital. So many ways to accomplish budgeting now!

    • Agreed, there are so many budgeting systems and apps available that the hardest part is really finding what is right for you. Sounds like a good system you have in place!

  9. I woud say as a freelancer it’s even MORE important to set up and follow a budget as best as you can. It can be tricky, as income is variable, but you need some kind of compass because you may never know when you have a slow month, and you need to be able to work around that.

    • Thanks for your thoughts! I’ve never worked as a freelancer so it is great to get your input about what works well for someone in that situation.

    • I completely agree, financial literacy should be taught to all students. When everyone is left to figure stuff out for themselves, it is no wonder so many people end up in such tough financial situations.

  10. I am a big fan of goals based budgeting so the biggest step with that is figuring out what your financial goals are and then breaking down the goal into attainable steps. Usually it involves saving money and when you put saving money as a focus, the other parts of the budget seem to fall into place.

  11. I have a rough budget, but I don’t track it very closely. I don’t need to because I have developed a habit of carefully evaluating every purchase and not buying anything I don’t need or that won’t make me happy. I honestly can’t remember the last time I bought any kind of electronic gadget. One tips is to avoid advertising and you can do a pretty good job of that by using an AdBlocker online and cutting cable.

    • I agree that avoiding advertising is super helpful in not spending money unnecessarily. I love Gmail because it automatically sends all promotional material to a separate folder. I don’t even look in there unless I’m searching for something specific. Helps remove so much temptation!

  12. Those are all great tips for budgeting. I think one more to add to the list is to budget to specific goals or funds you are saving for in the future.

    These goals could be trips, a car, a major purchase, replacements, or a bucket list item. Keeping those funds separate from your daily expenses builds some momentum when you are saving and enables you to pay cash once you have funded your goal.

    • That is a great point. Budgeting in support of goals is a great way to make sure your money is really going where you want it to.

  13. Contigency buffers and re-evaluating are so important for effective budgeting.
    You never know when something is going to crop up!

    Great post.

    • Thanks! Yes, there is always some unexpected something that comes up, so best to account for that in advance so you’re prepared.

  14. I recently set myself a stricter budget because I moved away from home and rent is pretty expensive, but I’m still having trouble sticking to it. I’m going to try the method of keeping budgeted amounts of cash in envelopes for next month. Have you tried that method at all? Would love any tips!

    • I haven’t tried the envelope system, but I think it would be a great tool for anyone just getting started with budgeting. My best tip would be to be realistic about expenses. Take a look at what you’ve spent historically and make sure you’re setting a budget that will still allow you to eat!

  15. All great tips. I think tracking your spending is incredibly important especially if you are on a tight budget. Otherwise it is so easy to lose track! I actually enjoy tracking my spending (I’m a bit of a budgeting nerd), but I can understand for others it can be painful. I find keeping on top of it (a few minutes each day) really helps!

    • I’m with you, I find it so fun to update my spreadsheets and keep track of where my money is going! I love the constant feedback loop, and using spending this month as motivation to make changes next month.

  16. Very smart advice! I never kept a strict budget until we bought a house. Since that and childcare seem to absorb most of our paycheck, being realistic is so important!

    • Nothing like some extra expenses to really help you see the importance of budgeting! Hope that your budget has helped make those expenses manageable.

  17. I track my finances using Mint because I find it very user-friendly and simple. I create a monthly budget so I can limit my spending and also keep track of it. I live on budget and is important to have a tool to help me monitor my finances.

    • That’s great, I also use Mint and think it is a super helpful tool. The real-time budget updates are a great way to stay on top of your spending.

  18. The re-evaluation step is absolutely my favorite because its so important and because so many people forget it! Circumstances change, and your budget has to change too! – Great tips!

  19. It’s so important to track expenses. We typically use a spreadsheet and mint.com to track our expenses. However, I have a lot of friends who love YNAB too.

    Re-evaluating the budget with your spouse or significant other on a weekly basis is a good idea. Great post thanks!

  20. As soon as I started tracking my expenses, I freaked out about how the little things really add up. It’s something I still struggle with because honestly, writing it all down daily is a bummer to me. Ha! Work in progress. Thank you for the tips Ali.

    Kindness is the best accessory,
    Rebecca Kelsey Sampson
    RebeccaKelsey.com

    • You might consider an app such as Mint if you don’t like recording daily expenses by hand. Its a great way to simplify the tracking process and still keep an eye on where your money is going!

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