How to Budget: A 6-Step Guide for Beginners

When you start getting serious about your finances, one of the first things you might realize is that a budget can help you answer a lot of questions, from “Can I afford this?” when you’re about to hit the add-to-cart button to “When can I retire?” when you’re thinking about your long-term plans. For many people, budgeting can seem intimidating or too time-consuming at first. But learning how to budget may be the key to setting yourself up for financial success. 

Budgeting doesn’t have to be complicated. This guide will take you through the process, including six steps for learning how to make a budget you can stick to.  

In this article, we’ll cover:

• What a budget is
• The importance of budgeting
• Calculating your net income
• Recording your spending habits
• Predictable vs. variable expenses
• Balancing your budget
• Types of budgeting
• Setting goals for your budget

What is a budget?

In its simplest form, budgeting is just figuring out how much you make and how much you spend and then using that information to inform your future financial decisions. Your budget allows you to plan how you’ll spend your income and keep track of money coming in and out. Tracking your spending lets you see your true financial picture in real-time so you can make informed choices. And planning ahead gives you a chance to put money toward your longer-term goals, like paying off credit cards, saving for a downpayment on a house, or planning for retirement.  

Why you should have a budget

Why learn how to make a budget? The short answer is that knowledge is power. It can be difficult to exercise control over your money until you have a clear picture of your finances. Once you’ve tracked your spending for a while, it’s possible to understand how your spending habits line up with your financial goals, get a better grasp on what expenses are likely to show up in the future, and start planning more effectively. Even if your budget is tight at the moment, having a clear picture of your income and expenses can reduce the stress of uncertainty. 

Maintaining a budget can help you:

• Keep your spending in check
• Avoid unnecessary debt
• Prepare for financial emergencies
• Build wealth for the long term
• Save for your retirement
• Clarify and support your life goals

6 Steps to budgeting your money

Step 1: Calculate your monthly net income

You may have heard the terms “gross income” and “net income.” Gross income is the total amount you earn before taxes, benefits, and other payroll deductions are taken out. Net income is the amount of money you actually take home every month after taxes. For budgeting, you want to identify your net income.

If your sole source of income is a job with a regular paycheck, it’s pretty straightforward: tally up the total amount of all your paychecks during a month. Your employer typically subtracts taxes and other deductions from your base salary before issuing your paycheck. 

You might have additional sources of income, so be sure to include those when calculating your monthly net income. This might include things like:  

• Alimony payments and/or child support 
• Government payments, like disability or veterans benefits
• Passive income, such as income from rental properties 
• Any money you earn from a side hustle or gig work

Tip: If you’re self-employed or have income from sources other than an employer, you might owe taxes on that money. And even if you work a full-time job, your employer might not take taxes out of your paycheck if you’re classified as a contractor. Be sure you understand whether you’ll owe taxes on any money you make; you’ll want to account for that when you calculate your expenses in step two. 

Step 2: Gather and record your expenses

Once you know how much money is coming in, figure out how much money is going out. Make a list of everything you spend money on every month and about how much you’re spending: bills, necessities, discretionary spending, etc. It can be tough to remember everything, so do some digging by looking at your records. 

You might start by reviewing statements from the accounts you use to pay for things, such as:

• Bank accounts
• Credit cards 
• Digital payment apps

Other useful information about expenses might be found in statements or receipts from:

• Car payments
• Car insurances
• Mortgage documents
• Utility bills
• Investment accounts
• Email receipts 

It can be helpful to look through 12 months of records to get a full picture of your spending. Some expenses vary from month to month, and any bill or subscription renewal that recurs yearly will only show up as a charge in one month over the course of the year. Budgeting requires being aware of and anticipating these expenses so you can plan for them. 

Tip: It can be harder to track expenses you pay for in cash; you might check your bank statements for ATM withdrawals to help jog your memory. Many people use cash for daily transactions: relatively small items you pay for every day, like lunch or bus fare. Over the course of a month, they can add up, so it may be wise to account for them in your budget. 

Step 3: Categorize fixed expenses vs. variable expenses

Among the easiest expenses to track are those that occur at regular intervals with the same amount, like rent or mortgage payments, your phone bill, and streaming services. These are called fixed expenses, and because they’re predictable, planning for them tends to be easier. 

Variable expenses, on the other hand, shift from month to month. They fall into two categories:

• Predictable expenses that you know will occur even if you don’t know the specific amount, like groceries or utility bills
• Unpredictable expenses that you can’t easily anticipate, such as home and car repair or health care emergencies

Expenses in the first category may vary from month to month but will typically stay within a certain range. The longer you track your spending, the better a feel you’ll get for how much to set aside for these categories. However, even these expenses can sometimes surprise you, as when gas prices suddenly rise. 

Unpredictable expenses are more challenging to budget for. If you own a car, you can reasonably assume that at some point it will need repairs, but you don’t know when or how much money it will cost. For this reason, many budget experts suggest building an emergency fund for contingencies. 

To get you started, here are some examples of different types of expenses: 

Fixed Expenses	Predictable Variable Expenses	Unpredictable Variable Expenses
Rent / mortgage	Groceries	Home repair
Car payment	Gas	Car repair
Insurance	Utilities	Medical emergencies
Phone / internet	Clothing	Pet care emergencies
Cable / streaming	Entertainment	Moving expenses
Gym memberships	Taxes	Pregnancy expenses

Tip: Trying to estimate variable expenses can feel like making a wild guess, especially if you’re a beginner figuring out how to make a budget. One way to get a sense of your monthly spending on predictable variable expenses is to add up how much you spent on them over the last year, then divide by 12 to get a monthly average. 

Step 4: Calculate your monthly income and expenses

This step is often referred to as balancing your budget; it can be the most sobering part of the process, but it may also be the most useful in planning for the future. If you want to gain any benefit from learning how to budget, you’ll need to be honest with yourself about your income and your spending habits. 

Add up all your monthly income and expenses, then subtract your expenses from your income. The number will tell you whether you’re in the red or in the black. Now it’s time to balance your budget.

• If you’re spending less than you earn, your income is enough to cover all your usual expenses. You can use your discretionary funds to store up for emergencies or start building your nest egg by saving or investing your money. 
• If you’re spending more than you’re taking in, you’re living beyond your means, and paying for things with credit cards can hide this fact for only so long. The good news is that learning how to budget will make it easier to gain control of your money. Look over your spending to see if there are areas where you can cut back, paying close attention to your non-essential spending. If you find that your spending is already at the bare minimum, you may want to look for additional sources of income.   

• You may also find that you’re generally in the black, but not by much, or that some months you come out ahead and some months you’re in the red. Reducing your spending on nonessential items might help you spend less than you earn more consistently and make it easier to plan for the future.

Step 5: Choose your budgeting method

You now have a clear picture of your financial situation; it’s time to start planning and tracking your spending. There are several approaches to budgeting, and each has its advocates. It’s up to you to find the method that works best for your circumstances and personality. You might even find that combining elements of different methods makes sense for you. What’s important is that you find a way of budgeting that you can commit to over the long haul.  

Here are some popular budgeting methods you might want to try out:

• 50-30-20 budget: The 50-30-20 budget helps you set your priorities by clearly laying out how much of your monthly income you should spend on each of three categories: 50% to needs, 30% to wants, and 20% to investing and saving. One advantage of the 50-30-20 budget rule is that it provides clear guidelines for your monthly spending while leaving flexibility to adjust as you continue learning how to budget for your personal circumstances.
• Zero-based budget: A zero-based budget is just what it sounds like: you assign every dollar of income a category until you hit zero. That includes all your expense categories: necessities, nonessential spending, investing, saving, and emergency funds. Some people enjoy planning with this level of specificity because it can help you feel in control and be disciplined about paying down debt or saving money. That said, you’ll need to track your spending extra closely to make sure you stay on target.
• Pay yourself first method: The pay yourself first budgeting method is oriented toward saving and puts your long-term financial goals at the top of the list of funded categories. Essentially, you begin your budgeting process each month by setting aside money for saving and investment. By prioritizing this part of your budget, you can keep your focus on building wealth; some people find it easier to cut down their spending on unnecessary things when the big picture is top-of-mind. 
• Envelope method: The envelope method is a classic approach that allocates the money you have on hand to your expense categories. In the most literal form of this budget, you put physical cash into envelopes marked with categories. Then, when it’s time to spend, you take the cash out of the relevant envelope; when the envelope is empty, your budget for that category is used up for the month. The envelope method is the conceptual basis for a lot of budgeting apps, including the Stash partitions feature.   

Step 6: Set realistic financial goals for yourself

Once you learn how to make a budget, the final step is to put your new budget plan to use. That means tracking your spending regularly, planning out your budget for each month, and readjusting as you learn. 

One of the keys to maintaining a budget is motivation: What are you trying to achieve financially? It could be a goal as modest as saving for a new couch or as ambitious as starting your own business. Keeping your focus on why you’re budgeting, and what you hope to get from it, can help you commit to the process.

When setting your goals, you may want to consider what’s achievable based on your current finances. For example:

• If you want to get out of credit card debt, you could focus on paying off one balance at a time using the snowball method to help your larger goal feel less daunting.
• If you want to cut your discretionary spending so you can save for something big, consider what you can realistically stick to. Just as cramming every minute of your day with tasks can lead to burnout, eliminating every source of pleasure from your budget can make it harder to follow.   

How to budget for beginners

If planning and tracking your spending is new territory, the steps above will get you started on the right foot. It may be helpful to keep in mind that you don’t have to get every detail correct from the very beginning. Your budget will always be changing to reflect your circumstances, and the more you use it the more accurate it will become. So get started now and give yourself permission to learn as you go.    

The best budget is the one you stick to

Just by deciding to learn how to budget, you’ve taken an important step toward improving your financial well-being. Budgeting will do you the most good if you can make it a lifelong habit, and taking a long-range perspective can allow you some leeway. If you overspend in a category one month, try to figure out whether you’re underestimating how much you need or if you can adjust your habits to spend less. Eventually, you’ll start to get a sense of the difference between what you need and what you want. Even the simplest budget can change your approach to spending,  saving, and investing for the long-term if you’re willing to commit to it over time.  

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