How to Create a Budget in 6 Simple Steps (2024)

If you’re looking to create a personal budget, start with these six steps

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Most people need some way of seeing where their money is going each month. A budget can help you feel more in control of your finances and make it easier to save money for your goals. The trick is to figure out a way to track your finances that works for you. The following steps can help you create a budget.

Step 1: Calculate your net income

The foundation of an effective budget is your net income. That’s your take-home pay—total wages or salary minus deductions for taxes and employer-provided programs such as retirement plans and health insurance. Focusing on your total salary instead of net income could lead to overspending because you’ll think you have more available money than you do. If you’re a freelancer, gig worker, contractor or are self-employed, make sure to keep detailed notes of your contracts and pay in order to help manage irregular income.

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Step 2: Track your spending

Once you know how much money you have coming in, the next step is to figure out where it’s going. Tracking and categorizing your expenses can help you determine what you are spending the most money on and where it might be easiest to save.

Begin by listing your fixed expenses. These are regular monthly bills such as rent or mortgage, utilities and car payments. Next list your variable expenses—those that may change from month to month, such as groceries, gas and entertainment. This is an area where you might find opportunities to cut back. Credit card and bank statements are a good place to start since they often itemize or categorize your monthly expenditures.

Record your daily spending with anything that’s handy—a pen and paper, an app or your smartphone, or budgeting spreadsheets or templates found online.

  • How to Create a Budget in 6 Simple Steps (3)

Step 3: Set realistic goals

Before you start sifting through the information you’ve tracked, make a list of your short- and long-term financial goals. Short-term goals should take around one to three years to achieve and might include things like setting up an emergency fund or paying down credit card debt. Long-term goals, such as saving for retirement or your child’s education, may take decades to reach. Remember, your goals don’t have to be set in stone, but identifying them can help motivate you to stick to your budget. For example, it may be easier to cut spending if you know you’re saving for a vacation.

More from Bank of America Bank of America Life Plan helps you create a plan that’s tailored to your goals.

Step 4: Make a plan

This is where everything comes together: What you’re actually spending vs. what you want to spend. Use the variable and fixed expenses you compiled to get a sense of what you’ll spend in the coming months. Then compare that to your net income and priorities. Consider setting specific—and realistic—spending limits for each category of expenses.

You might choose to break down your expenses even further, between things you need to have and things you want to have. For instance, if you drive to work every day, gasoline counts as a need. A monthly music subscription, however, may count as a want. This difference becomes important when you’re looking for ways to redirect money to your financial goals.

How to Create a Budget in 6 Simple Steps (5)

How to Create a Budget in 6 Simple Steps (6)

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What is the 50/30/20 rule?

The 50/30/20 rule is a budgeting technique that divides your take-home income into three categories by percentages. It’s a simple way to track your spending. Here’s the breakdown:

Rent or mortgage
Car payment

Streaming services

Savings or Debt
Emergency fund
Child’s education
Credit card payments

  • How to Create a Budget in 6 Simple Steps (7)

Step 5: Adjust your spending to stay on budget

Now that you’ve documented your income and spending, you can make any necessary adjustments so that you don’t overspend and have money to put toward your goals. Look toward your “wants” as the first area for cuts. Can you skip movie night in favor of a movie at home? If you’ve already adjusted your spending on wants, take a closer look at your spending on monthly payments. On close inspection a “need” may just be a “hard to part with.”

If the numbers still aren’t adding up, look at adjusting your fixed expenses. Could you, for instance, save more by shopping around for a better rate on auto or homeowners insurance? Such decisions come with big trade-offs, so make sure you carefully weigh your options.

Remember, even small savings can add up to a lot of money. You might be surprised at how much extra money you accumulate by making one minor adjustment at a time.

Step 6: Review your budget regularly

Once your budget is set, it’s important to review it and your spending on a regular basis to be sure you are staying on track. Few elements of your budget are set in stone: You may get a raise, your expenses may change or you may reach a goal and want to plan for a new one. Whatever the reason, get into the habit of regularly checking in with your budget following the steps above.


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The material provided on this website is for informational use only and is not intended for financial or investment advice. Bank of America Corporation and/or its affiliates assume no liability for any loss or damage resulting from one’s reliance on the material provided. Please also note that such material is not updated regularly and that some of the information may not therefore be current. Consult with your own financial professional when making decisions regarding your financial or investment management. ©2024 Bank of America Corporation.

As an expert in personal finance and budgeting, I've delved deeply into the intricacies of managing one's financial resources. My extensive experience and knowledge in this domain enable me to provide valuable insights into the concepts outlined in the article on creating a personal budget.

Step 1: Calculate your net income The foundation of any effective budget lies in understanding your net income. This refers to your take-home pay, accounting for deductions like taxes and employer-provided programs. It's crucial to focus on net income rather than total salary, as this ensures a realistic assessment of available funds, preventing potential overspending. For individuals with irregular income, such as freelancers or gig workers, meticulous record-keeping of contracts and payments is essential to manage financial fluctuations.

Step 2: Track your spending Once you've determined your income, tracking expenses becomes paramount. Categorizing both fixed and variable expenses provides a clear picture of where your money is going. Fixed expenses, like rent and utilities, offer stability, while variable expenses, such as groceries and entertainment, present opportunities for optimization. Utilizing credit card and bank statements to itemize monthly expenditures facilitates this tracking process. Whether through pen and paper, mobile apps, or online templates, recording daily spending is instrumental in maintaining financial awareness.

Step 3: Set realistic goals Establishing both short-term and long-term financial goals is a pivotal step in budgeting. Short-term goals, achievable within one to three years, may include building an emergency fund or paying off credit card debt. Long-term goals, such as retirement savings or funding a child's education, require strategic planning spanning decades. While goals can evolve, identifying them provides motivation to adhere to the budget, aligning spending habits with financial aspirations.

Step 4: Make a plan The crux of budgeting involves reconciling actual spending with desired spending. Analyzing compiled variable and fixed expenses aids in projecting future expenditures. Setting specific and realistic spending limits for each expense category ensures financial discipline. Distinguishing between needs and wants helps prioritize spending, directing resources toward essential items and financial goals. Techniques like the 50/30/20 rule offer a simplified approach to categorizing income for better tracking.

Step 5: Adjust your spending to stay on budget Regularly reviewing income and expenses allows for necessary adjustments to prevent overspending. Prioritizing cuts in discretionary spending, such as entertainment, ensures alignment with budgetary constraints. Evaluating fixed expenses, like insurance rates, can reveal opportunities for savings. Incremental adjustments, even in minor spending areas, contribute significantly to accumulating extra funds over time.

Step 6: Review your budget regularly Budgets are dynamic and require regular evaluation. Factors like salary changes, expense fluctuations, or achieving financial goals necessitate periodic reviews. Flexibility in adapting the budget to evolving circ*mstances ensures its continued effectiveness. Regular check-ins, following the outlined steps, help maintain financial control and adaptability.

In conclusion, mastering the art of budgeting involves a comprehensive understanding of income, expenses, and financial goals. By following these steps and remaining vigilant in budget reviews, individuals can achieve financial empowerment and stability.

How to Create a Budget in 6 Simple Steps (2024)
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