how to build your first budget
Updated April 07, 2023

How to Build Your First Budget in 5 Steps

Saving Money

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Almost everyone in the world wants to improve their financial situation, and many take drastic steps to do so.

But believe it or not, there’s a tool at your very fingertips that has the power to dramatically improve your overall finances: a budget.

Yet despite the power of budgeting, only 41% of Americans have a budget that they stick to.

In some ways, this is understandable. Creating (and following) a budget may seem daunting if you’ve never done it before.

But budgeting can actually be a simple process when broken into manageable steps.

In this article I’ll discuss five concrete steps you can take to set up your own budget and get your expenses under control. Watch my full video walkthrough below.

Step 1: Decide how you want to budget

online budgeting resource

When it comes to building a budget, the best place to start is by deciding how you want to budget. Do you want to use a pen and paper, a spreadsheet, an app, or something else entirely?

If you feel more comfortable doing things on desktop or mobile, you may want to consider using a free or affordable online budgeting resource like Mint, Personal Capital, or You Need a Budget (YNAB), all of which I’ve tried and liked.

And though you certainly don’t need an app or website, these services can make budgeting significantly easier for you by linking to your accounts, automatically importing and categorizing transactions, analyzing spending patterns, and performing other time-consuming tasks.

Every budgeting app has its own features, but the same general rules apply whether you’re using YNAB, Mint, Personal Capital, or even a notebook.

No matter how you choose to budget, there will be pros and cons, so it ultimately comes down to personal preference and what works best for you.

And if a specific app or method isn’t working for you, feel free to switch it out for something different; the goal is to find something that you know you’ll be able to stick to.

Step 2: Take a look at your transactions

spending transactions

After you’ve decided how you’re budgeting, the next step is to take a look at your transactions.

To get a good idea of where your money is going, it’s best to look back at your financial habits over a long period of time, as spending can fluctuate from day to day or week to week.

It’s okay to repeat this step and alter your budget when things change; as your life and circumstances shift, it’s natural for your spending habits to shift too, so it’s important that you stay flexible.

If you’re budgeting by hand, you can find your transaction history in your bank and credit card statements.

You’ll then need to go through your statements on your own, write down each transaction, and categorize each purchase.

If you’re using an app or website, you should be able to link it to your bank accounts and credit cards so that it can automatically import your transactions.

Depending on the service you’re using, these transactions may be automatically categorized, or you may need to go through them yourself.

Regardless, by the end of this process, you should have a categorized list of purchases so that you know exactly how much you’re spending in different categories each month.

And perhaps more motivating in terms of budgeting, you’ll also see how much — or how little — you’re saving.

At this point, you’ve already accomplished a lot. In fact, according to a recent Mint study, only 35% of Americans know how much money they spent in the previous month, meaning you’re already ahead of the majority of the country.

Step 3: Adjust your spending habits

spending habit adjustment

Once you know what your spending habits actually are, the next task is to figure out what you want them to be. As always, this comes down to your priorities and what you think your spending should look like.

In this step, you should find the categories where you tend to overspend, set a realistic spending goal, and then make the changes necessary to achieve that goal.

Be sure to start with something measurable and achievable; Rome wasn’t built in a day, and you won’t be able to change all your financial habits at once.

In general, you should repeat this process every month or two.

Check your statements or app, see how your results compare to the goals you set, and then adjust your budget accordingly.

If you managed to save that $50 on eating out, for example, you may be able to push for another $25 the next month.

On the other hand, if you exceeded your goal for that category by $100 but were $100 below your goal in another area, you may want to consider changing your goals to more realistically fit your spending habits.

Just know that while getting started is the hardest step, it’s equally important to be consistent if you want to get the most out of budgeting.

Related: 30+ Cash-Back Apps That Will Help You Save on Nearly Anything

Step 4: Decide what to do with extra money

extra money adjustments

So far, I’ve discussed budgeting as a way to reduce your expenses.

And if you’ve followed these steps so far, you should already be spending less than you were at first, leaving you with some extra money that you have to do something with.

If you already have a savings account with a good amount of money, you can start thinking about your other financial goals.

But almost 50% of Americans have no savings whatsoever, and nearly 70% have less than $1,000 in savings.

If you’re part of that 70%, I recommend using your extra money to set up a small emergency fund to give yourself more of a cushion.

Once you’ve made some progress in that respect, you can start putting money toward your other financial obligations, whether those include paying off debt, contributing to a retirement fund, or saving to meet a long-term goal.

Related: 13+ Ways to Get Free Stocks

Step 5: Avoid lifestyle creep

expensive lifestyle

In my opinion, cutting costs is perhaps the main reason to budget. However, that doesn’t mean it’s the only reason.

In fact, one of the biggest problems people have with money is that no matter how much they earn, they always find a way to spend it.

And if you aren’t tracking your expenses, that can be really easy to do.

However, in addition to helping control your spending habits, budgeting also gives you the means of thinking of any additional income as an opportunity to save; instead of spending your entire $1,000 raise, for example, you can save 25% and add the remaining 75% to your monthly spending categories.

Like everything else, this ultimately comes down to what you’re comfortable with; some save aggressively in order to retire early, while others only save 5-10%.

Regardless, budgeting allows you to see all the ways in which you’re wasting money, offering a chance to reevaluate those habits to see if you’d be better off shifting some of your money to savings, retirement, or other long-term goals.

Overall, budgeting doesn’t mean you shouldn’t have fun or spend money — it just gives you more control over your spending so you can ensure your money goes to things that matter to you.


Logan Allec, CPA

Logan is a practicing CPA and founder of Choice Tax Relief and Money Done Right. After spending nearly a decade in the corporate world helping big businesses save money, he launched his blog with the goal of helping everyday Americans earn, save, and invest more money. Learn more about Logan.

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