How to Create a Budget: The Ultimate Guide

Why You Need to Create a Budget

You may be like many people and cringe at the thought of budgeting. It can be perceived worse than some 4-letter words. 

People say things like ‘I won’t be able to have fun with a budget’ and ‘It’s too hard to stick to a budget’. 

I will tell you those things are true, but only to a point.

No, you won’t be able to trek off the Bahamas on a whim or indulge in shopping sprees every payday. In reality, how often are you able to do those things with your current situation? Probably not very often.

Once people have learned how to create a budget they often find having a budget to be very freeing. You will be able to plan to treat yourself while knowing all your bills are paid.

Budgeting is simply being intentional with your money not reckless or oblivious. In the personal finance world, a budget is a vital component of financial success. Here’s how to design a workable budget just for you.

How to Create a Budget:  Step 1. How Much Do You Earn

First, you need to determine how much money is coming into your household. Your income is the foundation of your budget because it will help you decide how drastically you may need to cut spending or if you may need to find ways to increase your income in order to reach your financial goals.

Take a look at your paystubs and see what you take home after taxes. If you have money coming in from other sources you will need to include that amount in your income as well. 

If your income fluctuates try to figure out an average you can use as your budget baseline. 

How to Create a Budget:  Step 2. List Your Expenses

Next, you will need to figure out how much you spend. Hopefully, this amount is less than what you are taking in. If not, we will cover ways to fix that problem in the following steps.

Start out with your fixed essentials. These are the bills you pay each month in which the amount stays the same and are required for your household to operate. Here are some examples:


  • Rent/Mortgage
  • Utilities (Gas, Electric)
  • Internet
  • Phone
  • TV
  • Loan Payments
  • Insurance


Then list the variable expenses you incur. Here are more examples of what those expenses may be:


  • Groceries
  • Gas
  • Giving
  • Pets
  • Entertainment
  • Gifts
  • Home Maintenance
  • Vehicle Maintenance


These are to get you started. Some variable expenses may be able to be included in your fixed expenses as you get more comfortable with a budget. For example, in our family budget, groceries are included in the fixed category. The reason for this is we found our grocery budget was a great place to save money. By setting a limit we are able to put money towards other things.

How to Create a Budget:  Step 3. Determine How Much Is Left

This step in creating a budget tends to be eye-opening for most people. A lot of times it’s not a positive experience. 

Shining a light on your financial situation gives you power so don’t be completely dismayed if you don’t like what you see. You now can make better decisions concerning your money to turn your situation around. 

Here is a rundown of how you will figure out how much money you have left at the end of the month: 


Total Income:  $4,000 per month


Rent/Mortgage:  $1,050

Utilities:  $300

Internet:  $70

Phone:  $100

TV:  $30

Loan Payments:  $600

Insurance:  $200

Groceries:  $300

Gas:  $250

Total Expenses:  $2,900

In this example, there is $1,100 left over after expenses. That leaves a little wiggle room in the budget but it doesn’t take much to eat up an extra $1,000 a month. If you are intentional about your spending you can allocate that money instead of wondering where it went at the end of the month. Remember, this is only an example. If you have less remaining than what is listed here you will need to be even more careful with your money. 


How to Create a Budget:  Step 4. Cut Spending

At this point, you know how much money you make and how much money goes out each month in expenses. Discovering this information may have led you to the realization that some changes need to be made. One such change is where you are spending more money than is necessary.

Cutting back on spending is beneficial no matter what your financial situation looks like. Reducing spending can help you get out of debt quicker or build up your nest egg faster in order to retire sooner.

Whatever your circumstances here are a few areas to take look at when considering where you can save:


  • Phone Service – Opt out of a plan by major carriers and make the switch to another network such at Republic Wireless. You will have the same coverage for significantly less money.
  • Gym Membership – When is the last time you were at the gym? Six months ago? Or are you a regular? Either way, you could save hundreds by canceling your pricey membership and opting to workout at home.
  • TV – Are you still subscribing to a satellite or cable provider? If so, you are likely overspending. Roku and smart TVs have made saving money on TV watching relatively easy to do. Hulu now offers live TV for less than $40 a month.
  • Groceries – Most Americans grossly overspend on food. On average 40% of food purchased is thrown out. That is a lot of money down the drain. To avoid this make a meal plan and only buy the foods needed to create the recipes. Who knows, you may see a thinner waistline and fatter bank account in the end.

For more money saving tips check out this in-depth money saving guide.

How to Create a Budget:  Step 5. Build Up Your Savings Account

Your monthly income has been established, your expenses deducted, and ways to save have been implemented. Now it’s time to decide what to do with the extra money in your bank account.

If you do not have an emergency savings account it’s time to get one started. Dave Ramsey suggests having at least $1,000 built up in this account to avoid a crisis. Unfortunately, many people add unexpected expenses to their credit cards with no way of knowing how or when they will be able to pay it off.

One way to build up your savings seamlessly is to automatically have a specific amount transferred from your checking account into savings each month. Treat this transaction just like another bill you have to pay. The extra money for this ‘payment’ can come from the spending cuts you made in step 4.

A helpful way to increase your savings with little to no extra work is to open a high-interest savings account. At CIT Bank you have the potential to earn up to 2.25 percent.

Once you hit the goal of $1,000 in an emergency fund, you should aim to have 3-6 months worth of expenses in your account to be prepared for any financial situation that may arise. 

How to Create a Budget:  Step 6. Choose a Budgeting Method

When it comes to budgeting methods there is no shortage of options. You will need to determine which fits your preferences and lifestyle.

If you process information better when using pen and paper use that method for keeping track. Or you may prefer having a digital copy that is available to you no matter where you are so Google Sheets may be your best bet. You could take it a step further and use free apps like Mint or Personal Capital. You can set budget categories, track spending, and keep an eye on your investments.

No method is more correct or better than another. Just pick a method that is easy for you to maintain. This way you can make the transition into budgeting less challenging thus increasing your chances of sticking to it.