How to Create a Budget

| April 18, 2011 | 2 Comments

Let’s face it, when most people hear the phrase “create a budget,” thoughts of boredom, exhaustion and drudgery aren’t far behind. The budgeting process most likely earned this stigma prior to the era of personal computing. There isn’t anything fun about sifting through piles of receipts and pecking on a calculator to create a paper budget. Luckily for us, there are many more efficient budget-building alternatives at our disposal. However, people still don’t know where to start when putting together a budget, let alone what items to include and how to organize them. Some people choose to use one of the multiple online services which can manage your budget: Mint, YNAB or Mvelopes. However, those are only useful if you understand a budget in the first place. I’ll explain how to set up a budget for yourself in the steps below.

A budget is simply a record of income and expenses over a period of time. The value is finding out where you can cut back and save some of your hard-earned money. Regardless of the time frame of your budget, you’ll need to gather evidence of your income and expenses to create the budget. Let’s start with the income. I’ve added screenshots of a sample monthly budget template that I created to illustrate the sections. A link to download the template is available at the end of the post.

Step 1: Determine Your Income

Make sure to count all sources of cash regardless of whether it goes into your pocket or bank account. Here is a screenshot from the Monthly Budget template to illustrate how the income section would be arranged.

Modern Saver Monthly Budget Template

Screenshot of the Budget Template: Income section

Additional items should be included in the income section, as necessary. Here are some ideas:

  • Paycheck (don’t include taxes and other deductions)
  • Social Security
  • Pension gains
  • Child support
  • Realized investment gains
  • Savings account interest
  • Revenue from sales (garage sale, Craigslist, eBay, etc.)
  • Unemployment checks
  • Cash gifts
  • Tax refunds

If you are not already using direct deposit into a bank account on most payments, you should make that change right now. Not only will direct deposit enforce a steady schedule of income, but you will be able to easily track your income by downloading your records from your online banking website.

If your income varies from month to month, make a monthly income estimate based on last year’s records. If income is consistent based on the month or season, carry forward your income from the same month in the previous year. Otherwise, if your income varies on a random basis, then you can divide last year’s income by 12 to get a monthly estimate. I recommend rounding the monthly estimate down to stay on the conservative side.

Step 2: Determine Your Expenses

Expenses are transactions from all payment methods: cash, checks, recurring bills, debit cards, and credit cards. You can categorize expenses any way you want. I use a certain categorization system and it works well for me, but it might not work for someone else because they don’t have expenses in the same categories. The best solution is to start your budget with a healthy number of categories and expand or consolidate later on, as necessary. Break your expenses into fixed (expenses that do not vary in amount) and non-fixed (expenses that vary based on usage; otherwise referred to as “variable”).


The fixed section will tend to not be over or under budget very often because these payments generally stay the same. Here are some examples:

  • Rent/Mortgage
  • Home owner’s / renter’s insurance
  • Car payment
  • Car insurance
  • Life / Health Insurance
  • School tuition / child care
  • Internet service
  • Savings
  • Credit card payment
Modern Saver Monthly Template Fixed Expense

Screenshot from the Monthly Budget: Fixed Expense Section


The non-fixed spending categories will vary from month to month. Here are some examples.

  • Groceries
  • Dining out
  • Utilities / Water / Sewage
  • Cable / Satellite TV
  • Phone / Long distance
  • Cell phone
  • Medical expenses
  • Gasoline
  • Public transportation
  • Auto maintenance
  • Parking & tolls
  • Subscriptions
  • Entertainment
  • Clothing
  • School supplies
  • Household maintenance
  • Personal items Monthly Budget Non-fixed Expense Section

Screenshot from the Monthly Budget: Non-fixed Expense Section

You may notice that the categories listed above could be divided even further. For example, “Entertainment” could be baseball games, movies, and tickets to the zoo. As I mentioned above, you should set the categories at a level of detail that fits your spending. However, keep in mind that the more specific your categories are, the deeper insight you will get from your budget.

A strategy that helps maintain a record of your spending quickly begins with minimizing cash payments and paying most of your expenses using debit or credit cards. The importance of spending money with these cards is that it creates a record which will be easily obtainable through your banking website or credit card website. Most (if not all) financial institutions provide a record of transactions, including transaction dates and merchant categories, spanning the previous 90 days or more. If your bank does not provide an easy method to export transaction information into Excel format, it will only take a few extra minutes to modify the formatting of the transaction text as you copy and paste from the website to your Excel budget.

Step 3: Set the Budget

At this point, you’ve written down all of your actual income and expense amounts from the previous month in one column. The next step is to create a budget for the next month. Assuming your career paycheck and interest payments are fairly consistent, your income columns will stay the same. Your focus should be on each expense category and which ones could be reduced. For example, are you spending $1,000 on dining out each month? Do you think you could get by on $900? Write down $900 in the budget column for next month and follow the same process for every other expense category. If you’re wondering how much to eliminate from your spending, I have developed an easy method to figure that out:

  1. Subtract your monthly expenses from your income. Is there money left over? If you are an average American, you are probably spending more than you bring home. Stop that. Make up that difference by lowering your spending on multiple categories in your budget. Remember, you don’t have to cut out any one category entirely. Many little changes go a long way. The ultimate goal at this point is to reach a “balanced budget” where income equals expenses.
  2. If you are spending less than you earn, it’s time to focus on saving. Have you stored away an emergency savings account? (An emergency savings account should equal 6 months of your current after-tax income). Adjust your spending with the goal of saving 10%-15% of your income every month to contribute to your emergency fund. If 10%-15% is a stretch, any amount will suffice. The key aspect is that you’re saving.
  3. If you are spending less than you earn and already have an emergency fund, you deserve a huge congratulations. Next step: are you saving 15% for retirement? Work with your employer to automatically set aside 15% into a retirement account and design your budget to live off the remaining 85% each month.

Step 4: Calculate the Difference

At the end of the month, it’s time to calculate the difference between your budget and actual amounts. You will need to repeat steps #1 and #2 to obtain all of your income and expense data from the month. Hopefully you have been using debit and credit cards so you’re able to download or copy/paste this data into a spreadsheet in a matter of minutes. Add your actual income and spending next to the budgeted amount in each category so you can determine the difference. If you’re using a spreadsheet, the calculation looks like this:

Monthly Budget Template Difference Calculation

Screenshot from the Monthly Budget Template - Demo of difference calculation

If you’re over budget in a particular category, there are only three possible problems:

  1. Your budget is unrealistic – you just can’t spend any less (Hint: this probably isn’t the problem).
  2. There was an unexpected expenditure.
  3. You’re still spending more than you should be on that category.

Diagnose any problems among the expense categories and adjust the next month’s budget accordingly. If you are spending less than the budgeted amount in any category, that should represent saved money. That should not be money that is used to “cover” any budgets that were missed. However, there will be a few months of trial and error at the beginning of your budget journey where you can certainly cover for mistakes. Once you become more in tune with your budget, the best thing you can do with savings is allocate them towards paying down a loan or mortgage.

Step 5: Set a Budget Update Schedule

One of the most popular questions about budgeting is “how often do I need to update it?” While you don’t want to wait a long period of time between budget updates, you certainly don’t want to be updating your budget every time you spend a dollar at the vending machine. The frequency of your budget updates is entirely up to you. Keep in mind that if your spending is completely out of control, you should keep a closer eye on your budget. That means updating your budget on at least a weekly basis. If you’re more diligent about spending and just want to understand where your money is going and how you could make large impact changes, you can get by with updating your budget on a monthly or quarterly basis.

The key to success is to pick a schedule and stick with it because the budget is not going to update itself. Add an appointment in your calendar if that’s what you need. Remember: a budget is not a dreadful as everyone makes it sound. You should be able to update it in less than 30 minutes and know exactly how you should spend your money next month. I have made the monthly budget template used on this post available at no cost. Download the Monthly Budget Template and get a head start on your budget.

Any questions? Please post them in the comments section below along with any other budget tips I didn’t mention. Thanks!

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Category: Saving

Comments (2)

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  1. Lori says:

    When you use the term ‘non-fixed’ is it the same as variable? I just want to make sure because I’ve heard that one before too.

    • Joe says:

      Good question! Yes, when I used the term “non-fixed” in this article, it means the same as “variable.” Many will use the terms “fixed cost” and “variable cost” but I was aiming to simplify the article by staying consistent. Regardless of the terminology, the key point is that some charges remain constant while others vary in amount and frequency.

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