How to create a budget
Updated September 29, 2021

How to Make a Budget

Saving Money

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Everyone wants to find new ways to save money and use income more effectively, but getting started isn’t always easy. If you’re new to the intricacies of personal finance, you may not know where to start with budgeting.

This article will cover the most important information you should know and steps to take when creating your first budget. The most important thing is building a budget you can commit to — it’s much better to make small, sustainable adjustments than to try to make unrealistic changes.

Review Recent Statements

The first step toward creating an effective budget is going through your most recent bank and credit card statements to identify spending patterns and see exactly where your money is going. You can’t work toward new financial goals until you understand where you are right now.

Categorize each transaction. Separate nights out, for example, from necessities like rent, bills, and saving. You can either review this information yourself or use one of many mobile apps to automatically sort transactions and figure out how much you spend on each category.

Tip: Overcome Financial Anxiety

Anxieties about money are common, so don’t feel bad if you’re worried about reviewing your statements and taking an honest look at your financial situation. It might sound overwhelming, but you’ll feel better once you understand where you are in relation to where you want to be.

Our attitudes toward money are often set in childhood and can be difficult to change, so don’t expect to completely adjust your outlook overnight. Adopting a healthier perspective is one of the most rewarding challenges involved in personal finance, but it isn’t always easy.

Set Measurable Goals

Now that you have a clearer understanding of your financial situation, you can work toward goals based on your financial and personal circumstances. Budgeting is all about adjusting your approach to spending, and you may need to sacrifice some immediate conveniences to improve your long-term financial outlook.

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If you spend 25% of your income at restaurants, for example, this could be taking away from financial priorities like building an emergency fund and saving for retirement.

Rather than cut your spending immediately to reach your ideal percentage, start with more manageable adjustments, and see how things go. You could try to reduce that number to something like 22.5% in the second month, then 20% in the third.

But your goals aren’t written in stone. If you find it easy to reach that 20% goal in your second month, consider pushing for 17.5% or even 15% in the next. Or think about slowing down if you’re consistently having trouble reaching your goals to make sure your goals work for you.

Tip: Find Goals That Motivate You

Measurable goals are the best way to structure your approach to budgeting and analyze your results. Without clear goals, it can be difficult to determine whether or not (or in which ways) your budget is working. It’s almost impossible to improve your approach if you can’t identify its strengths and weaknesses.

However, this is far from their only benefit.

The goals you set shouldn’t be purely financial — if you simply decide to save an extra $100 per month, for example, you’ll probably be willing to use some of that money on other things if you need some extra cash. Budgeting without overarching goals could make it hard to maintain your motivation and stick to your plan.

It’s Not All About the Money

Instead of saving just to have more money, connect this financial goal to a benefit beyond your finances. This could be anything from retirement or college to travel or buying your own home. It’ll be harder to flake on your savings targets when they’re tied to something important to you.

Understanding the real-world impact of your financial decisions will also help you come up with better goals. Instead of starting with your current budget and trying to figure out how much you can afford to save, start by examining your long-term needs and identifying the changes you need to make to attain your ideal financial future.

Start Saving Money

Once you know how much you want to save each month, deduct that amount from your budget and keep it separate from the rest of your cash. Your employer may be able to help you set up direct deposits into a separate account for a portion of your paycheck so you aren’t tempted to use the money you’re supposed to save.

When you’re new to budgeting, avoid thinking of saving as something to do if you’re fortunate enough to have money left over at the end of the month. This common perception leads people to underestimate the importance of savings and put it off. Saving should be the first thing you do with your discretionary funds.

Tip: Maximize Your Yield

There are a variety of ways to save and invest your money, and you can often earn more money by taking advantage of options other than a standard checking or savings account.

The simplest way to increase returns on your savings is to move from a conventional savings account to one that offers higher interest. Increasing your interest rate from 0.1% to 1.5%, for example, could help you add tens or even hundreds of dollars each year to your savings.

High-yield savings accounts are available from digital and brick-and-mortar banks.

Tip: Consider Investing

You could earn significantly more money by putting your savings into a portfolio and investing in stocks, bonds, or funds. Whether or not the higher potential reward is worth taking on more risk depends on your financial situation, but you should at least think about the benefits of investing rather than saving.

Many people are overwhelmed by the idea of getting into investing for the first time, but managing an investment portfolio is simpler than it sounds. New investors have access to a variety of investing services and educational resources to help you learn more about trading and improve your investment strategies.

If you haven’t invested before, consider setting up a retirement fund to start. Retirement accounts like IRAs and 401(k)s come with unique tax benefits that aren’t available with traditional brokerage accounts, and some employers match your 401(k) contributions.

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Tip: Keep Some Money Liquid

Liquidity isn’t always the most important factor to consider when you’re weighing your options, but it’s important to keep at least some of your savings in an accessible form with as little risk as possible.

You might not be able to predict things like losing your job or suffering an injury, and these can wreak havoc on even the most considered budgets. If the market happens to crash at the same time, your entire financial situation could be flipped on its head overnight.

With that in mind, put some money in some kind of savings account for safekeeping before you consider investment. Even just a few hundred dollars could cover a diverse set of circumstances, so an emergency fund should be a top priority if you don’t already have one.

While a small emergency fund will go a long way, continue contributing some of your paycheck to this account until you have enough saved to cover a long-term hiatus from earning an income.

Most financial experts recommend building an emergency fund that could pay for three to six months’ expenses, possibly more or less depending on your current income, expenses, and job security.

Consider Future Purchases

The first steps in budgeting examine your financial past, but looking forward is also important. Take a proactive approach to think about your future purchases well before they come up.

You can’t predict the kinds of things that require an emergency fund, but you often know about big purchases several months before you make them. Accounting for this in your budget allows you to spread the financial impact over a longer period rather than transforming your budget for a single month.

If you know you’ll need to spend $600 in three months, for example, you can save $200 per month instead of waiting until that month to come up with $600 or relying on credit.

Tip: Look into Financing Options

Paying with cash is always nice, but it may not always be possible. You may not be able to budget in advance for every purchase, but you can find ways to make up the difference. Expensive items often come with financing options to make them accessible to a wider audience.

If you can pay that same $600 in four installments of $150, you have twice as long to save money. Rather than saving $600 in a single month or $200 across three, you’ll owe just $150 per month, making less of an impact on your lifestyle.

Tip: Consider a Credit Card

Credit cards are a hot topic in personal finance, and it’s easy to lose a lot of money by overestimating your ability to pay off the balance. Only use them if you have a clear plan to pay the money back without accruing too much interest.

If the seller doesn’t offer competitive financing options, a credit card may be the best way to spread out a purchase. Many credit cards come with an introductory period during which you won’t be charged interest, giving you free access to a longer payment plan.

Signing up for a card with a 12-month promotional period, for example, would enable you to reduce your monthly payment on the same $600 balance to just $50 per month. Budget to pay off the entire balance by the end of the introductory period to avoid paying interest.

Have Someone Hold You Accountable

These tips will help you develop a sustainable approach to budgeting, and some people find the process more natural than others. Unfortunately, many of us have difficulties budgeting at some point, and it’s easy to simply give up entirely and lose the progress you’ve made.

Some people hold themselves to a higher standard when they know they’re accountable to someone else. Working with an accountability partner can keep you interested in budgeting. Like workout partners, accountability partners are there to keep you committed even when you lose your motivation or your goals seem unattainable.

How to Find an Accountability Partner

Your budget is a personal topic, so find an accountability partner you trust to keep your information private and offer their honest opinion on each issue. Don’t pick someone who will be hesitant to speak up if things aren’t going well — they should help you identify the issue and adjust your approach to get back on track. It could be anyone close to you including friends, family members, and coworkers.

Once you’ve found an accountability partner, meet at least every few weeks to discuss your progress and come up with plans for the future.

Get Your Budget Started

Getting started with budgeting may seem confusing, but improving your spending habits is surprisingly straightforward. These tips will help you develop a budget that works for your financial and personal needs.

Budgeting is an ongoing process — review this information every month, and look for new ways to optimize your budget.


Alex McOmie

Alex McOmie is a freelance writer for Money Done Right. He joined the Money Done Right editorial team in summer 2019. Learn more about Alex.


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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