How to Create a Budget – The Complete Guide

By Lacey Langford
Published on: 04/07/2020

Knowing how to create a budget is a critical part of your financial success. A budget can help you manage your money, make progress towards debt payoff, saving and retirement, break the cycle of living paycheck to paycheck, and help you achieve financial short and long-term goals.

As a financial coach, budgeting is something I highly recommend to people who want to get control of their finances and save money.

People often skip budgeting because it involves work, and creating a good budget takes time and planning. But if you want to get your financial house in order, having a budget is crucial.

What’s in this guide?

This guide is packed with practical, actionable insights to help you get started with budgeting. Including:

What is a budget?

A budget is a plan for the money you're earning and the money you're spending on a monthly and yearly basis. It's a tool to help you track your spending, manage your payments and bills, as well as fund the fun in your life.

In other words, it helps you better manage your finances by getting a clear picture of your monthly cash flow.

Your budget will help you determine one of three things about your current financial state:

  1. If you have a deficit. A deficit is when your expenses are more than your income. This is when you spend more money than you make each month.
  2. If you have a surplus. A surplus means you have cash available after deducting your monthly expenses from your income.
  3. If your spending is balanced. a balanced budget is when your monthly income and expenses are even. In this situation, you do not have a surplus or a deficit each month.

Why you should want a budget

A budget helps you manage the day-to-day of reaching your financial goals by keeping you on track. It also helps you identify if there are any bills or budget categories you could cut back on, so you can free up more money to spend elsewhere.

It provides a clear picture of your current financial situation and helps make sure that money goes where it needs to. It also enables you to catch mistakes in your finances early instead of when things get out of hand.

Plus, a budget makes sure you have cash on hand to meet your needs. When you have the money to meet your needs, it dramatically reduces your financial stress.

4 budgeting types

There are many different ways to budget, so pick whichever budgeting type helps you best manage your money.

Here are some different types of budgeting you can choose from, along with some people who might benefit from this type of budgeting the most.

Budget type #1 - Zero-based budgeting

This is the most popular budgeting type, which accounts for every dollar you spend. You start with your income and then allocate every dollar to a specific line in your budget until your income minus expenses are zero (or a balanced budget).

Who it’s for:

This budgeting type works best for people who like to track every dollar, whether that’s through a credit card statement or bank account, or through budgeting apps.

If you live for data, lean Type-A, love organization and details, this could be the budgeting approach for you.

Budget type #2 - 50-30-20 budget

When using this type of budgeting, the goal is to spend 50% of your after-tax income on necessities like housing, food, and utilities while only spending 30% on wants. The other 20% goes to savings and debt payments.

With this method, you don't have to be as detailed with budgeting. Instead, you're keeping your expenses within those percentages.

Who it’s for:

If tracking your spending line by line makes you cringe, this more fluid, high-level type of budgeting could be just what you need.

Budget type #3 - Goal-based budget

This method is best known as “paying yourself first.”

A goal-based budget is where you begin budgeting by putting money towards your goal first and then adjusting the rest of your budget around the goal.

For example, if your goal is to save $100 each month, you would save the $100 first and then work the rest of your expenses around the income you have left.

Who it’s for:

If you’re trying to save for a down payment, build an emergency savings fund, or pay down credit card debt for example, this budget type helps ensure you put money towards that goal each month.

Whether you’re focused on short-term goals, or long-term goals, this budget type could help you achieve them.

Budget type #4 - The envelope budget

Envelop budgeting is a method where you use a series of envelopes to manage your income. It works like this:

  1. Each envelope is labeled with expenses like food or gas.
  2. You put the cash you allocated for that expense into the envelope.
  3. When the money in that envelope is gone, that’s it. You have no more to spend in that are for the month, unless you take it from another envelope.

This method helps make budgeting more real because you are physically taking the money from the envelope. You see the amount in the envelope go down as you spend.

Who it’s for:

This approach is for the tactile learners and the impulse-shoppers. Sometimes swiping a card can be too easy for overspending, which is where switching to cash can help.

Cash not an option? If using cash-only doesn’t work for you, some online budgeting tools will let you mimic the cash envelope method digitally instead.

4 methods to create your budget

When it comes to deciding which method to choose, pick the one that works best with your financial goals and, most importantly, select a technique that you'll actually use.

Pick a method that works for you

You can put all the time and effort in the world into making a budget, but it's utterly worthless if you don't use it.

I've had many clients come in and say they've done a budget before, but then tell me they never used it. When I ask why not, the answer is usually that they didn't understand it or they don't like the budget they created.

If you aren't comfortable using an excel spreadsheet, then that's not the best way to build your budget. Remember, the goal is for you to live by the budget.

Don’t overthink your budgeting method

That said, don't overthink which method to use. If you do that, you'll end up delaying the most important part, getting started.

When it comes to deciding how to budget:

  1. Give it a little thought
  2. Pick a type and method
  3. Then just give it a try

If you don't like the way you're budgeting, you can always change it later.

Here are 4 methods you can use to create your budget...

Budgeting method #1 - Pen and paper

It may be old fashioned, but for most people, pen and paper gets the job done just fine. I've had many clients who prefer using a notebook to maintain their budget.

For most people, this is an easy and straightforward solution to create a budget. Having a simple budget doesn't mean it is any less effective.

Budgeting method #2 - Spreadsheets

Using spreadsheets to create your budget is a popular method. Using software makes it easy to make changes to your budget. It also makes it easy to calculate your budget using formulas.

Budgeting method #3 - Dry erase board

I've had many clients that want their budget front and center in their life.

They are often visual learners or people that want the accountability of seeing their budget on the kitchen wall every morning.

This is also an excellent method to get the entire family on board with budgeting.

Budgeting method #4 - Apps

Depending on your tech level, apps can be a fun and easy way to create a budget you can access anywhere and anytime.

The great thing about apps is you can try different ones out until you find one that works for you.

I would lean towards free apps first that you may be able to use through your bank before paying, especially if you are in debt.

How to start budgeting in 6 steps

When you don't know where to begin, it can be hard to get started. And often it's that first step that's the most difficult. The most important part, though, is to get started.

How do you create a budget that works? Here are the steps to build a budget.

1 - Layout your goals

What are the financial goals you are working towards? Is it save for retirement or get out of debt? Or build up your emergency fund to $2,000?

Whatever it is, know what you are trying to achieve with your money.

2 - Pick your type

Based on your goals and what works for you, what kind of budget do you want to do?

Is it goal-based budgeting to save that $2,000 for emergencies, or do you want to make every dollar work for you with a zero-based budget?

3 - Choose your method

How are you going to maintain your budget? Will you use Excel or a notebook to track your budget? (You can also use a combination of methods).

If you want to keep your notebook handy to keep notes on your budget but want the ease of using an app, you can do that too! Don't be scared to mix it up.

4 - Account for all your income

Create a list of all the income you receive to put in your budget. Include your W-2 income, any money from side hustles, or things like alimony and child support.

5 - Make a list of all your expenses

When you create a list of your expenses, check this list twice. Missing expenses can throw off your whole budget.

Use your bank statements to double-check that you aren't missing an expense. Don’t forget to add the costs that don't come every month like oil changes and vehicle registration.

6 - Make adjustments when necessary

Your budget isn't something you just set and forget. It will require review and changes every so often—especially in the beginning.

Each month, look at what you allocated for each budget category and make sure it's in alignment with your actual spending.

For example, if you budgeted $200 for gas money but really spent $250, then you need to either add cash to your budget for gas or reduce your spending this next month.

When to review your budget

Creating a budget doesn't end when you've added the last expense. Your budget is a fluid tool. You want to update and adjust your budget anytime you have a change to your income, expenses, or goals.

Hopefully, you'll reach your goals quickly and therefore, will need to adjust your budget for your new goals. Reviewing your budget monthly or as needed will help you keep it up to date and in line with your goals.

7 common budgeting mistakes

Mistakes can cost you time and money. Here are some common mistakes when it comes to budgeting that you can avoid to save you money and keep your spending plan on track.

Mistake #1 - Not accounting for irregular expenses

The number one mistake people make when it comes to budgeting is not accounting for costs that do not occur every month.

For example, you do not pay your vehicle registration every month or get new tires every month, but those are both expenses that you will need to pay.

There are also unexpected expenses, which is where having an emergency fund could help.

If you do not add those into your budget when those expenses come up, they can wreak havoc on your plan.

Mistake #2 - Skipping goal-setting

Knowing the goal you want your money to work towards is crucial to creating a budget. Also, goal setting is an integral part of keeping you motivated to stay on track.

When you skip that part, not only do you not know where you're going, you have no motivation to try and stick with it.

Mistake #3 - Not sticking with it

The quickest way to make a budget mistake is to give up before you've had a chance to reap the rewards of using a budget.

Do not quit using your budget.

You took the time to make it, so give it time to work and help you reach your financial goals.

Mistake #4 - Making it unrealistic

Making your budget too strict is a mistake.

It's like going a crash diet, you may stick to it for a bit, but sooner than later, you'll break from your budget because it's too restrictive.

Another pitfall is setting goals that aren't realistic.

Bottom line? Creating a realistic budget will help your overall budgeting success.

Mistake #5 - Inaccurate information

Not inputting or keeping your budget up-to-date with your correct information is a mistake.

Missing expenses in your budget, or not adding important categories like emergency savings or entertainment will also cause problems later.

At some point, you are going to want to have some quality of life too. So be sure to add those items to your budget.

Mistake #6 - Overspending

Your budget isn't just numbers on a page. Make sure your spending is the same or less than the amount you have budgeted for. If you don't, it's a mistake.

If you say you're only going to spend $100 per month on entertainment and then you go and spend $150 on it, that's going to hurt your budget.

Make sure your spending aligns with what you have budgeted for.

Mistake #7 - Not adding a buffer

Try as you might, there will be mistakes in your budget or things that come up that require you to spend money you didn't plan. When you are building your budget, leave a little cushion to cover for Murphy's Law.

That way, you don't have to dip into other areas of your budget.

Final thoughts

Learning how to create a budget is worth the investment of your time. Creating a clear picture of the money you’re earning and the expenses you incur each month can help you plan and prepare to reach your financial goals.

The most important part of a budget is using it, so find a method that works for you and stick with it. Doing that and avoiding budgeting mistakes will help you manage your money like a pro!

About the author

Lacey Langford, AFC® is The Military Money Expert® and the founder of, a personal finance blog specializing in the unique world of the U.S. military. Lacey's the creator and host of The Military Money Show, a podcast dedicated to helping the military community with personal finance. She's an Accredited Financial Counselor® with over 15 years of experience in financial planning, counseling, and coaching. Her education includes an Executive Certificate in Financial Planning from Duke University and a B.S. in Finance from the University of North Carolina at Wilmington. As a U.S. Air Force Veteran, military spouse, financial coach, speaker, and writer, she changes people's lives from being fearful of money to having control and confidence with it.

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Written on April 7, 2020
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