How to make a budget (and stick to it)

Money By Emily Larson June 14, 2024

Why does it pay to know how to make a budget? It’s all about taking control of your finances. Tracking your expenses and following a plan puts your money to work in the best ways.

Budgeting makes paying bills on time easier. It provides a clear path to saving money for major expenses like a new house or car. And it can help you build up your emergency fund. The list of benefits goes on.

If all those perks leave you wondering how to create a budget, Western Union is here to help. So, are you ready to get your money in order and learn what budgeting is all about?

We’ll get you started with this step-by-step guide to creating a budget and managing your money for the better.

1. List your monthly income

The first step to creating a budget is figuring out how much money you have to work with. Start by calculating your gross and net income. Here’s how:

• Your gross income is the total money you earn before deducting things like taxes or retirement contributions. Calculate it by simply adding up all your income sources. This includes your salary, bonuses, and any other income (like money from freelance work or side gigs).
Your net income is how much money you actually bring home and can spend. You’ll sometimes hear it called “take-home pay.” To figure out your net income, subtract all automatic deductions from your gross income, including all taxes, 401k contributions, and wage garnishments.

2. List your monthly expenses

The next step in creating a budget is to figure out how much money you’re spending every month—and how much money you need to spend. Do this by listing out and adding up your monthly expenses.

For example, how much are you spending on groceries total each month? How much do you pay for car insurance? What about rent or mortgage?

Consider listing your expenses in a spreadsheet for easy tracking (and a helping hand with the math). Tools like Microsoft Excel and Google Sheets even have budgeting templates built into their template galleries. You can also check out one of the many budgeting apps available.

Once you have your list of expenses, categorize them into fixed or variable expenses.

• Fixed or unchanging expenses stay the same every month and include things like rent, mortgage, insurance, loan payments, internet, and mobile phone bills.
Variable or changing expenses vary from month to month and include groceries, entertainment, dining out, transportation, and electric and water bills.

You can break down your expenses even further by sorting them into subcategories like “utilities,” “entertainment,” or “transportation.”

3. Subtract monthly expenses from monthly income to calculate budget surpluses and deficits

Understanding budget surpluses and deficits is a big part of learning how to make a budget.

• A budget surplus is any extra money you have after paying all your expenses.
A budget deficit occurs when your income doesn’t cover all your expenses.

To determine your surplus or deficit, subtract your monthly expenses from your net income. If the result is positive, you have a surplus of that amount. If the result is negative, your deficit is that amount.

This is where those spreadsheets and budgeting apps come in handy. They can automatically calculate your surplus or deficit for you.

4. Set realistic financial goals

Now that you have a better idea of your current financial situation, you can set goals. It helps to set short- and long-term financial goals and keep them realistic. It’s generally in your best interest to prioritize higher-stakes goals, such as paying off debt, saving for emergencies, or planning for major expenses.

Above all, the key is to strike the right balance between your income and expenses. This is where those surplus and deficit figures come into play. Getting into surplus territory puts you in a strong financial position and opens the door to bigger goals.

When setting realistic financial goals, use your variable and fixed expense list to get a sense of where you can cut back. It’s usually easier to cut back on your variable expenses, but that’s not always the case.

For example, a streaming service is a fixed expense, but it’s one that’s easy to eliminate. On the other hand, power and water are variable expenses, but it’d be tough to live without them.

A realistic financial goal is something definitive and attainable, with an achievable deadline.

Consider the 50/30/20 rule

One common budgeting rule of thumb is the 50/30/20 rule. It works like this: You put 50% of your money toward needs, 30% toward wants, and 20% toward savings. Here’s what that looks like:

• Needs (50): Includes necessities, such as rent, utilities, and groceries.
Wants (30): Includes things you want but aren’t necessities, such as entertainment and luxuries.
Savings (20): Includes short- or long-term savings vehicles, including retirement accounts, savings accounts, and investments.

The 50/30/20 rule helps budgeters meet their needs while still saving. Best of all, it enables you to enjoy your life in a fiscally responsible way.

5. Track your spending each month

Carefully track all your spending each month to make sure you’re sticking to your budget. You can do this with pen and paper, but it’s much more convenient with the spending-tracking spreadsheets and apps we mentioned earlier.

As the month goes on, adjust your budget as needed. For example, you may find that one month, you spend less on an essential than you had budgeted. This would free you to spend more money on a desired purchase or put more into savings.

6. Review and revise before the beginning of each month

Life is constantly changing, and so are your expenses. That means you’ll have to regularly review and revise your budget to make sure it’s accurate and in line with your goals.

Something to keep in mind when learning how to make a household budget is that the ideal time to refresh your finances is during regular check-ins before the beginning of each month.

What goes into a refresh? At a high level, it involves analyzing your spending habits, reviewing ongoing bills, and rethinking your budget. That way, you can proactively revise your budget as you go. Some changes will be permanent and others temporary.

Reasons to permanently revise your budget include:

Changes in income, like a raise
Changes in expenses, such as paying off a loan
Inflationary hikes that permanently drive up the costs of goods and services

Reasons to make temporary or one-off budget revisions might include expenses related to anniversaries, holidays, and personal or family emergencies.

How to make a budget and stick to it

Knowing how to make a budget won’t help unless you stick to it. Keeping to a carefully planned budget can do wonders for your financial success.

Luckily, there are many helpful exercises you can use to stay on budget. Here are some of the most impactful:

Set up autodrafts and payments

When planning how to make a personal budget, consider setting up autodrafts and other forms of automatic payment for your debt payments. This includes things like credit cards, student loans, and car payments. Even better, you can set up autodrafts for monthly contributions to savings accounts and retirement funds.

There are many benefits to autodrafts. Not only do they avoid missed payments and late fees, but they also are relatively painless. And bonus: If you never “see” the money, you’re never tempted to spend it.

Take it week by week

A month is a long time. That’s why many people find a week-by-week approach is their answer to the question of how to make a budget plan.

A shorter time frame can make staying on top of your goals easier. It keeps the focus on the present and helps prevent the bigger picture from overwhelming you. It also forces you to pay more regular attention to your finances.

Perhaps most importantly, it provides you with greater moment-to-moment flexibility. That way, you can adjust your budget to better meet your changing needs.

Cut down on credit cards

When creating a budget, many struggle with credit card debt—and the interest that comes with it. If this includes you, consider closing certain credit cards or using your credit card less often. However, be aware that closing credit card accounts can take a toll on your credit score.

Other useful ways to keep credit cards from throwing your budget out of whack include prioritizing paying off your credit card debt or using cash or debit cards to pay for purchases.

Plan ahead when creating a budget

While unexpected expenses and emergencies happen, planning ahead is vital to creating a budget and sticking to it. For example, if you know that you have a wedding coming up, you can budget for it over several months. Another example is planning out meals ahead of time to reduce the amount you spend going out to eat.

Find an accountability partner

You’re much more likely to meet your goals with a partner to hold you accountable. While it’s not a necessity, someone who already knows how to make a budget and stick to it makes an ideal accountability partner.

Romantic partners, friends, or family members with similar financial goals can provide you with the support, encouragement, and advice you need to stay on track. And, chances are, you won’t want to let them down.

Brainstorm ways to save money together and check into resources like our guide to savings, made simple.

More tips for how to make a budget and stick to it

• Prioritize your needs versus your wants. While it’s ok to treat yourself and enjoy life, put your needs first when making your budget.
Use budgeting apps. There are many apps available that will help with different aspects of budgeting. Using them and the expertise they provide makes budgeting that much easier.
Build and maintain an emergency fund. Tapping into your emergency fund to cover small- to medium-sized emergencies keeps you from having to take funds from elsewhere in your budget.
Celebrate small victories. Celebrating small wins helps you stay motivated during the long periods when budgeting can be tough.


What are the first steps to create a budget?

Here are the three steps to create a budget:

  1. List all your sources of income. Calculate how much money you earn monthly from all your income streams. Be sure to include money from your wages or salary, side hustle, or any other source of income. Come up with a firm monthly income total you can plan your budget around.
  2. Make a list of all your expenses. Track your current spending to categorize monthly costs like housing, utilities, food, and transportation. Don’t forget to include loan or debt payments, savings contributions, and any regular support you provide loved ones. The goal is to capture all monthly expenses to avoid missing any costs.
  3. Subtract your total expenses from your total monthly income. This simple math will determine if you have a surplus or deficit each month. If your income exceeds expenses (surplus), you should have money to allocate towards additional financial goals like debt payments or savings. If expenses exceed income (deficit), you should reduce spending to better balance your budget.

What are the key components of a household budget?

The key components of a household budget typically include:

• Income: List all sources and amounts of income you receive each month, such as your salary or wages, interest from investments, pension payments, or child support.
• Fixed Expenses: Essential expenses that tend to stay the same each month, like rent/ or mortgage payments, car payments, or insurance premiums.
Variable expenses: Expenses that fluctuate each month, including utilities, groceries, gas, dining out, and entertainment. Analyze past months’ totals to estimate.
Savings: Pay yourself first by setting aside funds each month for short- and long-term savings goals, such as an emergency fund and retirement. Savings is a high priority budget component.
Debt payments: List minimum monthly payments due for all outstanding debts like credit cards, student loans, or personal loans. Budget larger payments if possible to pay off debts faster.
Additional financial goals: Allocate funds each month for any other financial priorities, such as vacations, major purchases, or college funds.

Are there any budgeting tools or apps that can assist me?

There are several tools and apps that can help you create a budget. Spreadsheet tools like Microsoft Excel and Google Sheets have budget templates built directly into them. These templates enable you to track income, expenses, and savings goals easily. They automatically calculate sums and balances for you; some even create visual charts from your data.

Budgeting apps are also available to download on your smartphone or tablet. Apps like Mint, YNAB (You Need a Budget), and PocketGuard can sync with your bank accounts to automatically import spending data. These apps can categorize transactions and even learn your habits over time to provide personalized insights and forecasts.

How often should I review and update my budget?

Review your budget at least once a month. You might need to review it more frequently in the following situations:

• When first starting out budgeting to adjust categories and get accurate numbers.
• With every paycheck or income receipt to confirm money is allocated as planned.
• After major unexpected expenses to cover overspending and reallocate as needed.
• When bills or debt payments change to update budget amounts.
• After large purchases that require budget changes.
• During seasons of higher spending, like summer or holiday seasons.
• With any other major financial or life changes such as a new job, raise/lowered income, or family changes.

What are some common budgeting mistakes to avoid?

Here are a handful of common budgeting mistakes you should watch out for:

• Using overly broad categories like “entertainment” or “miscellaneous.” These types of categories make it difficult to track what you’re spending.
• Setting rigid, unrealistic targets, which often leads to blown budgets.
• Not monitoring what you spend.
• Not balancing your budget.
• Not planning for irregular expenses.
• Not reviewing and adjusting monthly and each time income or life situations change.
• Waiting to save.

By avoiding these missteps, your budget has a greater chance of becoming an intuitive, sustainable money management system. But remember, the worst mistake is not having a budget at all.


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