How to Make a Budget (and Stick to it): A 6-Step Guide

Budgeting is one of those things where, you know you're supposed to do it, but you just don't want to do it.

Well, today's the day you do it anyway.

Below is a beginner's guide to budgeting that will show you how to make a budget that truly works for YOU. Not me. Not your neighbor. You!

Because here's the thing:budgets are not one-size-fits-all. A good budget should be customized to suit your exact needs and goals, and that's what we're going to show you how to create (and stick to).

But first:

What Is a Budget?

A budget is essentially a map for your money. Once you have a proper budget in place, it'll help you guide your dollars into the right areas to ensure that your savings goals are met, bills are paid on time, and that there's still some leftover cash available for you to spend on the things that make you happy.

Yes, you read that right:you can have a budget AND enjoy your money at the same time.

Contrary to popular belief, budgets aren't all about restricting your spending (or happiness). A well-thought-out budget will actually help you get more value out of your money by helping you prioritize the things that matter most (while eliminating the things that matter the least).

Sound good? Let's get started:

How to Make a Budget From Scratch in 6 Easy Steps

Budgeting as a beginner can be a bit intimidating at first, but when you break things down, it's really not as scary (or difficult) as it looks.

Here's our simple 6-step guide to preparing, setting up, and sticking to a budget:

Step 1. Write Down Your Financial Goals

Before you start crunching numbers and getting into the nitty-gritty, try to think of why you want to start a budget in the first place. What goals are you trying to accomplish?

For example:

Are you trying to pay off debt?Do you want to increase your savings rate?Are you tired of living paycheck to paycheck?

Whatever the case may be, write down at least 3 good reasons why you want to start a budget. Make them compelling and specific.

If you need ideas, here are some things a budget should help you accomplish:

Building a $500-$1,000 emergency fundPaying off high-interest debt (e.g. credit card debt)Saving 15-20% of your take-home pay for retirement Saving extra money for something you really want (e.g. a vacation)

(Check out our guide to the basics of personal finance for more goal-setting tips.)

Step 2. Calculate Your Take-Home Pay

Now that you have some goals written down, the next step to take before you start budgeting is to figure out your take-home pay (i.e. the amount of money you earn after taxes and other deductions are accounted for).

If you're an employee and you receive a paycheck on a regularly scheduled basis, your take-home pay should be pretty easy to calculate. Just add up your paychecks for an average month or use this simple calculator for a more accurate estimate.

If, on the other hand, your income is irregular (e.g. you're self-employed, you earn tips, you're paid based on commission, etc.), figuring out your take-home pay will be a bit more tricky. Your best bet will be to review your income from the last few months, average it out, and then subtract your estimated taxes and business expenses.

Tip:Underestimate your income. That way, the worst that can happen is you have more money available in your budget than you previously expected -- not a bad problem to have!

Step 3. Analyze Your Expenses

Now that you know how much money you're bringing in each month, it's time to figure out how much is going out.

To start, list out and add up your fixed expenses. These are the predictable expenses that typically cost the same amount each month. Examples include rent, car insurance, subscription services (e.g. gym, Netflix), debt payments, etc. You should be able to recall these pretty easily.

Next, move onto your variable expenses. These are the expenses that -- as you can probably guess -- vary in cost each month. Examples include groceries, gas, eating out, clothes, personal spending, etc. To get an accurate look at your typical spending in these categories, try downloading and analyzing the last few months of your bank/credit card statements. If that's not possible (e.g. you use cash only), try monitoring your spending for the next month or so and go from there.

Don't worry about being 100% accurate while writing out your estimated monthly expenses. The purpose of this step is to get an idea of your typical spending habits. That way, you can figure out whether or not you need to cut back, and where you can make those cuts.

If after adding up your typical monthly expenses you find that they exceed your take-home pay (i.e. the number you calculated in step two), you'll definitely need to start looking for areas to cut back. The next step can help with that:

Step 4. Determine Your Needs and Wants

Continuing from the step above, now's a good time to label each of your expenses as either a need or a want.

The basic requirements for something to be considered a need?

It's necessary for your survival (e.g. groceries)It enables you to make money (e.g. gas to get to work)You'll get in trouble if you don't pay it (e.g. debt)

That's really it. If an expense doesn't fit into one of those baskets, it's most likely a want.

Labeling each of your expenses as either a need or a want will help you prioritize your spending and find ways to cut back. On top of that, if you ever need to quickly reduce your spending in the future (e.g. during job loss), having a list of low-priority expenses will make things a lot easier.

Following up from step three, if your current monthly expenses exceed your take-home pay or prevent you from being able to accomplish your other financial goals (e.g. savings, debt payoff), review your list of wants and make some cuts. You should also try reducing other expense areas (e.g. rent, groceries, transportation, etc.) if possible.

Step 5. Figure Out Your Ideal Budgeting Method

OK. You've calculated your take-home pay, listed out your typical monthly expenses, labeled each expense on your list as a need or a want, and hopefully cut or reduced your spending in certain categories if necessary. Now you're ready to pick a budgeting method to keep yourself on track in the coming months.

If you're a budgeting beginner, don't be afraid to experiment with different options! There are a variety of ways to budget, and what works for someone else might not work great for you, and vice-versa.

Here are a few common budgeting methods and systems to choose from:

Zero-sum budgeting - This is the most involved type of budgeting. It involves assigning every dollar you earn a specific role. In other words, you'll be assigning a specific amount of money each month to groceries, rent, debt payments, savings, clothes, etc. until there's nothing left over. A tool like You Need a Budget can be helpful for maintaining this type of system, however, it can be overwhelming for beginners.50/30/20 budget - This is going to be the best option for most beginner budgeters as it's flexible and easy to get started with. It's called the 50/30/20 budget because it involves assigning 50% of your income to needs, 30% to wants, and 20% to savings. Of course, these numbers won't always work for everyone, so if you go this route, be sure to monitor and adjust things to fit your unique situation. (That said, you should always aim to save at least 15-20% of your take-home pay if possible.)Cash envelope budgeting - If you find yourself overspending a lot (even with a budget in place), the cash envelope system is a good addition to one of the two budgeting methods listed above. It involves converting one or more of your budget categories -- typically the ones you overspend on most often -- into cash-only categories. So for example, if you find yourself constantly overspending on groceries, you would set yourself an ideal monthly spending limit (e.g. $500), withdraw it in cash, and put it in an envelope. Then, once you spend what's in the envelope, that's it. You can't withdraw more cash until the next month. This can be a really effective way to cut down on impulse purchases as it forces you to work within a strict spending limit. Just don't cheat!

In the end, each of the budgeting methods above has its own pros and cons. Whichever method you choose --whether it's one of the above, a combination of all three, or something else -- be sure to utilize it in a way that enables you to accomplish the financial goals you set in step one.

Step 6. Track, Review, and Update Regularly

Great job! You've set up a budget. Now for the hard part:sticking to it.

In order to stay consistent and on track, it's best to review and update your budget once a month. This shouldn't take any longer than an hour or two, so set a date and time and stick to it! If you're having trouble, find an accountability partner and review your budgets together.

You can decide how to do your own monthly budget review, but to help you get started, here's what we recommend doing:

Track your account balances and debts. You can use a simple spreadsheet for this. Be sure to include any and all savings accounts, chequing accounts, retirement/investment accounts, credit cards, etc.Review your spending from the previous month. This will help you stay on top of your spending habits and find potential savings.Review and update your financial goals. Setting goals is only one part of the process! Be sure to track your progress and make changes when necessary.

That's it! If you go through each of these steps every single month, you'll be much more likely to stick to your budget and accomplish your financial goals.

Budgeting Tips and Mistakes to Avoid

Automate when you can - Automation is the ultimate budgeting cheat code. If you find an opportunity to do it, take it. For example, you might want to set things up so that your savings are automatically pulled from your chequing account on a set date each month.Pay yourself first - Continuing from the last tip, whether you automate or not, be sure to always set aside your savings as soon as you get paid. That way, you eliminate the chance of accidentally spending money you were supposed to save. As mentioned above, try to always save at least 15-20% of your take-home pay if possible. (Note:if you're contributing to an employer-sponsored retirement plan, don't forget to include that when calculating your savings rate!)Be sure to put your money to work. Don't let your hard-earned savings go to waste sitting in a low-interest savings account! Even if you don't have a lot saved just yet, you can start investing with very little money.Keep an emergency fund - Your emergency fund should contain at least $500-$1,000 and will come in handy for unexpected expenses like car repairs. Over time, you'll ideally want to build this fund to be able to cover 3-6 months worth of living expenses in case of a bigger emergency such as job loss. Stay reasonable - A big mistake beginner budgeters make is getting overly excited and optimistic while setting up a budget. They end up creating unrealistic expectations for themselves, and a couple of months down the road, they're back to square one. Don't make the same mistake! Keep things realistic.Try to increase your income - Whether through a raise, promotion, or side hustle (check out our guide on how to make money with your phone or these ways to earn free gift cards), earning even just an extra $100 a month can make a huge difference in your budget.Don't forget about debt - Paying off high-interest debt (if you have any) should be one of your top priorities. Learn how to create a debt payoff strategy and be sure to incorporate it into your budget!

Final Thoughts

Don't expect your budget to be perfect right off the bat. There's a good chance you forgot about a particular expense or miscalculated some numbers along the way, and that's okay. The key is to stay consistent. Review your budget every month. Be mindful of your spending. Get rid of that high-interest debt that's weighing you down. Build up those savings.

Keep at it, and eventually, your budget will be working like a well-oiled machine.

(If you found this budgeting guide helpful, be sure to share it with a friend or family member! Budgeting together is always easier than going at it alone.)