Steps to Making a Budget in 9 Practical Steps

If you’ve ever wondered how to set a budget and stick to it, you’re certainly not alone. Fortunately, a budget plan doesn’t have to be a restriction or an obligation to say “no” to everything you want. It’s about making a plan for your money, so you decide where it goes before you spend it.

In this guide, Tower Loan offers practical steps for what to include in a budget and tips for establishing a month-to-month budget planner. When you understand your budget, you can responsibly borrow money with a personal loan when you need access to quick cash for unexpected expenses.

Step 1: Collect and Organize Your Finances

The first step to creating a budget is to gather your financial information for the past two to three months. Items to collect include:

• Pay stubs
• Income records
• Bank statements
• Credit card statements
• Rent and mortgage bills
• Bills for utilities, insurance, and loans
• Receipts for other everyday expenses

To streamline this step, consider using a digital tool or mobile app.

Step 2: Track Your Income and Spending

The next step in how to create a budget is to identify all sources of your income so that you can track how much money is coming in. You might include salary or wages from your primary job income. Additionally, you may have secondary income, such as side hustles, freelance work, and benefits. Don’t forget to add seasonal or irregular income, such as commissions or bonuses.

Once you compile this information, ensure you account for all expenses, including fixed costs such as rent, insurance, and loan payments. Also, add variable expenses like groceries and gas, as well as discretionary spending on entertainment and dining out.

Step 3: Assess Your Financial Reality

Once you’ve collected this information on your personal budget sheet, look for patterns and anything that stands out. Ask yourself which expenses are really essential and where you can realistically cut back.

If your expenses exceed your income, focus on reducing non-essential spending. You may want to look into creative ways to boost your income, cut subscriptions, or negotiate bills with your providers.

Step 4: Distinguish Your Needs, Wants, and Priorities

Your financial needs are non-negotiable expenses like housing, food, transportation, and utilities. Other needs include insurance, minimum debt payments, and savings.

Your wants enhance your lifestyle, but aren’t essential. Examples of wants are travel, hobbies, subscriptions, restaurants, and entertainment. It’s necessary to balance your needs and wants so your budget plan reflects your financial priorities. Part of the budgeting process is working toward goals such as paying down debt, building an emergency fund, and saving for the future.

Step 5: Choose a Budget Plan That Fits Your Lifestyle

One popular budgeting plan is the 50/30/20 budget, in which you set aside 50% for needs, 30% for wants, and 20% for savings. Zero-based budgeting assigns a dollar to every job. Pay-yourself-first budgeting prioritizes saving over spending, and the envelope system requires putting cash into envelopes for spending categories.

Step 6: Assign Amounts to Each Financial Category

You can use a spreadsheet, app, or month-to-month budget planner to allocate dollar amounts to each category: fixed needs, variable needs, wants, and savings goals.

Step 7:Plan for Unexpected and Irregular Expenses

The next step in making a budget is to address non-monthly costs, such as irregular expenses like car maintenance, medical expenses, and holiday gifts. You can budget for unexpected costs by dividing your annual costs by 12 and saving monthly—plan by setting aside three to six months of expenses in an emergency fund.

Step 8: Simplify with Budgeting Tools

Budgeting tools like spreadsheets, budgeting apps, and bank-based budgeting features can help you simplify your budget. It’s also helpful to automate your savings contributions and use bill reminders and auto-pay to keep on top of your financial obligations.

Step 9: Periodically Review, Change, and Improve Your Budget

The answer to how to create a budget will evolve as your life changes, so review your monthly budget each month to identify overspending trends. You can reallocate funds as needed and adjust your budget for life events like moving or a new job.

Common Budget Planning Mistakes to Avoid

• Creating a budget that’s too restrictive
• Forgetting to include irregular expenses
• Neglecting fun and entertainment in your budget
• Setting unrealistic goals
• Giving up on your budget after a month of splurges

Long-Term Benefits of How to Create a Budget

Over time, you can develop strategies for creating a budget with long-term goals in mind. A future-focused budget will reduce financial stress and help you establish habits to reduce debt, work toward goals like buying a house, and plan for retirement.

FAQ About How to Make Budgets

If you want to learn more about how to make a budget, below are answers to common questions we frequently receive.

Tower Loan is here to help you find a personal loan that works with your budget and simplify the application process so you can get the money you need right away. You can apply for a loan online, in our local offices, and through our mobile app.

How do I create a budget if I’ve never done one before?

Start simple by tracking income and expenses for a month, then build a budget from there.

How much money should I save each month?

Plan to save at least 20% of your income per month. However, be easy on yourself because any consistent saving is financial progress.

What if my expenses are higher than my income?

Focus on cutting out non-essential spending, increasing your income, or negotiating down bills.

Which budgeting method is best for beginners?

Many people find the 50/30/20 budget or the pay-yourself-first approach is easiest. However, the best budget for your lifestyle depends on your income level and financial goals.

How often should I review or update my budget?

Aim to review your budget each month to identify issues and readjust accordingly.

What expenses do people commonly forget to budget for?

It’s common for people to forget to factor in medical costs, car repairs, and subscription services when budgeting.

Do I need budgeting software or apps to be successful?

Not necessarily, a simple spreadsheet or a written plan in a notebook can work just as well to create a budget.

What should I do if I keep overspending in one category?

Try reducing your spending elsewhere, or adjust that category limit to maintain a sustainable financial balance.