Budgeting can feel a lot like guessing and failing in the beginning.
You can save yourself time by using worksheets or an app that guides you through the process but the basics of creating your first budget are actually easy. You need to figure out how much money you are bringing in and how much money you are spending.
For most people you are going to budget your after tax post deduction income. Basically you want to give the money you bring home an assignment so you can better optimize your budget to achieve all of your financial goals.
So let’s get started creating your first budget.
Gather Your Budgeting Supplies
First, gather up all the supplies you’ll need to determine your current expenses and spending. To start your first budget you will need a few different things in order to get organized.
The supplies you will need to create your first budget includes:
- pen (my fav: Paper Mate InkJoy Gel Pen)
- highlighter (my fav: Zebra Pen Mildliner Highlighter)
- paper for notes
- budgeting worksheet (like this neutral budgeting worksheet)
- bank statements (for debit card/checks/cash withdrawals)
- credit card statements
- bill statements
These are the basic supplies you will need to gather up in order to understand your current spending habits so that you will be able to start your first budget and get on the path to financial success.
Write Out All Your Monthly Bills
For the first step, write out all your bills. You can start by brainstorming a list and writing down everything you remember. This list should include everything you pay every month that is a set price like your rent or mortgage, utility bills,
On first glance relying on memory you may forget some bills. It is very easy to forget about bills that are on autopay or subscription plan. Next you’ll want to give your statements a look and add anything you’ve forgotten, which includes things like subscriptions.
Next to each bill write the due date or the date you pay it every month. This will help you for the next steps where you are going to plot out your expenses based on when things must be paid.
Order Your Bills By Calendar & Paycheck
Now, write out all of those bills in order or on a calendar view. This step is optional but it is very, very helpful especially if you feel like you’ve been living paycheck to paycheck and struggling to find any money during certain times of the month.
Laying out your bills in a visual format can help you see areas where you can improve. Maybe all of your bills are due at one time of the month so it’s obvious why you are struggling to have anything left over during that paycheck.
Look at the month and add in where you get paid so you can see where bills are actually falling. The two biggest things you can do with your bill due dates in order to stop living paycheck to paycheck are to change your due dates and to split bigger bills between paychecks.
- If all of your bills fall within one paycheck period, call and move some of your bill due dates. This is easy to do with a lot of companies and they will move when your payment is due to earlier or later in the month. Spreading our your bills throughout the month and splitting them between paycheck cycles can be very helpful.
- Split your big bills between multiple paychecks if possible. For most people your biggest monthly payment is your rent or mortgage. You can split this between two paychecks in order to make it easier to pay and leave you more disposable money one each paycheck. In our case, we were paying our $1,200 mortgage payment all at once but that took up the entirety of one of our paychecks. So we contacted our mortgage company and switched to biweekly payments so now we pay $600 every other week. This is much easier to do and eased a lot of the burden on our budget. You can do this with big bills like rent by putting aside half of the bill payment in savings until the paycheck when it’s ready to be paid. So every paycheck you’ll be saving something toward that bill instead of having to pay it all at once.
Categorize Your Previous Spending
Once you have gathered up all of your budgeting supplies, it is time to take a look at what you have already been spending every month. This process will be eye opening if you have never done it before. Most people are shocked by how much they spend in certain categories – but it is critical that you take a look at the spending you’ve already been doing!
For this step you will review your spending over the last three months and group spending into categories. This can take a little bit of time but is absolutely critical knowledge to have.
The easiest way to do it is to go through your statements and assign each type of spending a highlighter color. Then when you are done highlighting a month into categories, add up all the spending in that category. Doing this for three months gives you a better idea of what you actually spend than just doing it for a month.
Set Reasonable Goals For Spending
Now that you know what you were already spending, it is time to add your variable spending to your budget plan. You will look at the categories of spending and set new budget amounts for each one based on reducing your previous spending in a reasonable way.
Once you have your totals, be realistic about those categories for your first month of budgeting. Don’t try to cut them to the bare bones immediately – that is just a recipe for failing and giving up on budgeting in the first month!
If you were spending $1,000 on food each month for the last three months, try reducing it by 10% the first month of budgeting and only plan to spend $900. If you spend less than that because you are more aware then great job! However, if you instead only gave yourself $200 for food for the month and ending up spending $500, it would feel like a failure.
By starting to cut your spending by realistic amounts in the beginning, it will help you make progress instead of feeling like a failure and giving up immediately. Seeing the money you’ve saved from the very beginning will give you a satisfactory win during your first budget months.
Plan Your Sinking Funds
Finally, think about your sinking funds and irregular expenses. Everyone has some items they must pay for during the year but don’t happen every month. This includes things like car insurance, car maintenance, yearly vet visits for pets. You can set up sinking funds for a number of categories including these 13 popular sinking funds.
To plan your sinking funds you will need to figure these out along with the amount you need for each irregular bill or an estimate of unexpected expenses. When you know the full number for an irregular bill you will divide this number by the amount of months or paychecks until you need to pay it.
As an example, if you want to save $600 for Christmas, divide that by 12 and plan to save $50 a month. If you have to pay $300 in car insurance that is due every 6 months, but you are only 3 months away and get paid twice a month, then divide that $300 by 6 for a total of $50 you need to save each paycheck.
Do this exercise for each expense you have and then create a sinking fund or separate savings account to store that money until the bill is due and needs to be paid. We do this in our Capital One banking account but there are many other banks that allow this and you can also create one account and keep a spreadsheet of the money you’ve got for each sinking fund.
Add All Your Expenses Up
The final step of creating your budget is to list the dollar amount for all of your bills, your expected spending in each variable category and your savings amount for your sinking funds. Now add it all up! This is the amount you’ll need to have in income to cover your expenses.
If your income exceeds this total number, then great! You’re done and can plan to add the leftover income amount to your financial goals like saving or paying down debt.
If your income won’t cover this final number then you need to look back at all the numbers and find areas to cut the expenses and spending levels. While you don’t want to be drastic with your first budget, you do need to make cuts in order to cover everything you are going to spend. If you have been living above your means and spending too much each month then this process might be more painful.
The number one rule of budgeting is to never ever ever ever spend more than you make. If your income is less than your planned expenses then you need to make more changes.
Track Your Spending
The last and most important part of budgeting is the one we all tend to gloss over but it is crucial – you must track your spending.
If you don’t track your spending, how will you know if your budget worked or not? You won’t and being disorganized is what leads a lot of people into tricky debt situations.
You can track your spending in a number of ways – write it down on pen and paper, keep a spending log, use an app that automatically pulls your bank transactions that you just have to categorize.
There are many ways to do it but you need to pay attention and keep track of how much you are spending – especially in categories where you tend to overspend. For us that budget category where we overspend is eating out and groceries. These are categories where we have to carefully track what we spend and use cash envelopes to give ourselves a hard stop so we don’t go over budget.
Create A Prioritized Spending Plan
One thing to note is that not everyone can budget the same way and this is especially true if you have a variable income. If you have an income based on commission or is otherwise variable then you need to create both a prioritized spending plan and a savings account to even out your income.
If your income is variable or inconsistent then you can create a priority list for all the things you’d like to do after your bills, expenses, and sinking funds are taken care of with your budget. With inconsistent income you need to cover the must haves first and then each month plan to do as much as you can with what you bring in.
You should always plan to have your main expenses covered by your lowest / worst case income in a month. When you have a very good month you can cover more of your prioritized list and also add extra income to your savings account that will then be used on months with less income. This can help you adjust to having a roller coaster income and make months less volatile.
Continue Making Cuts & Adjustments
After your first budget is made and passes you can then review your budget to see how well you did. Many people don’t do a great job the first month or even the first 3 times or more!
In fact, we were very bad at budgeting for a long time. It took us about a year to get our budget fine tuned and another year to cut out enough expenses so that our spending was covered by just one income.
Adjusting your budget over time and continually making cuts to reduce your spending so you can increase savings is a normal part of budgeting. Work on finding ways to be more frugal and new ways to save money that you can implement each month and keep reducing your overall expenses!
Keep On Budgeting!
All of these steps will get easier and easier each time you do them. Eventually you will be budgeting without much thought and flying through your financial goals.
Just remember that the first time you make a budget is the hardest but it’s also the first step to a better, happier, more secure financial life without stress and worry.
Your future budgets will get better and sometimes even future budgets will be a mess. Budgeting is a continual process where you learn and change and adjust as you go. The two main rules are to always spend less than you make and track where your money goes! Everything else you can adjust to fit how you personally like to do those two things!
Mary is the founder of Pennies Not Perfection where she teaches how to make online income to build wealth and gain freedom. She quit her day job in 2021 after she doubled her salary.
Mary's favorite free financial tool is Personal Capital. She uses their free tools to track investments, grow her net worth and work toward to financial freedom.