How to budget: a beginner’s guide

Rachel Cribby
Last updated: April 23, 2023

Why you can trust us

The team at WealthRocket only recommends products and services that we would use ourselves and that we believe will provide value to our readers. However, we advocate for you to continue to do your own research and make educated decisions.

When was the last time you updated your personal budget? Sorry — we said the dreaded “b” word. Even though everyone knows the benefits of the budget deep-down (some of us deeper than others), many of us don’t know how to budget, or at least how to budget in a way that sticks.

In this article, we will show you how to make a budget that takes into consideration the common questions and concerns that the average beginner has.

A budget doesn’t have to be a scary thing, but you’re not alone if it feels that way. Let’s approach the big burly budget beast together!

A step-by-step guide to budgeting

This step-by-step guide on how to make a budget details one solid approach to create a budget that works for anyone who puts in the effort and follows these steps.

1. Decide on a medium

The first step to budgeting is deciding on a medium that works for you. No, not that kind of medium—although we wouldn’t say no to a psychic who came with insights about our future financial life. We’re talking about where you’ll store your budgeting info.

Some use a classic spreadsheet for their budget, while others swear by a bullet journal that uses pen and paper. There is also no shortage of budgeting apps out there.

If you feel excited about the way you’re budgeting, you’re more likely to feel compelled to update it regularly.

Should is the operative word here. Firstly, when we are talking about savings in this case, it’s mostly referring to retirement savings, which, as you know, are an entirely different beast than rainy-day savings.

2. Figure Out Your Post-Tax Income

It can be downright frightening to take a microscope to your finances, especially if you have been spending without a budget for a while.

But to move forward and achieve financial health, you are going to need to take an honest look at your income and spending.

If you work in a salaried position, your take-home pay will be straightforward.

However, if you work part-time, freelance, or on an hourly basis, it can be harder to find a reliable number to stick to.

Some people find it helpful to determine what their average income has been over the past six months, while others find it more comforting to base their budget on the lowest possible earning scenario that they need to survive.

3. Evaluate your spending

Now that you have come to a number that most accurately reflects your monthly earnings, we can turn our attention to the other side of the budgeting equation: spending.

One common mistake that new budgeters make is basing their monthly spending off of the lowest possible numbers. While conservative estimates may make you feel more comfortable initially, they are not sustainable. Chances are that you will find yourself regularly exceeding this stringent set amount.

To determine your monthly expenses, you should figure in non-negotiable monthly expenses, such as rent or mortgage payments, childcare, transportation costs, utility, phone, and internet bills, and insurance payments. Things like debt repayments and minimum savings account contributions should also be counted among essential expenses.

These are all important, but make sure that you leave room in your budget for other lifestyle expenses. Recreational expenses like entertainment, eating out, and travel can contribute to your quality of life and goals for the future, which can help motivate you to stick to your budget.

4. Scout out necessary adjustments

If your monthly expenses are lower than your monthly income, then congratulations! You are already halfway to budgeting bliss. If you are exceeding your monthly income, don’t beat yourself up too much for it. That’s why we’re here.

Take a look at where you can make adjustments. For most people, this will mean cutting back on your fun spending categories like dining out or entertainment purchases. Monthly recurring expenses can also be a great place to look for extraneous spendings, such as subscriptions or memberships that you are not using.

5. Make a budgeting commitment

While you can certainly maintain a budget by tending to it on a monthly basis, you can make it easier on yourself by updating your budget on a daily basis.

We use the word commitment here because this is genuinely what it is. If you need a reminder, find one that works for you, such as an alert on your phone or a sticky note on your desk. Like any other habit, it takes time for your budgeting routine to stick. But once you make it a part of your morning or evening rituals, you will start to wonder how you ever lived without it.

Different types of budgeting

Do you still dread the idea of creating a budget? Well, you’re in luck! There are different budgeting methods and approaches to budgeting, such as the Envelope Budgeting Method, the 50/30/20 Budgeting Method, the 80/20 Budgeting Method, and the Zero-Based Budgeting Method, all listed below.

1. The envelope budgeting method

The “envelope method” is a simple way to save money by keeping it in (literal or electronic) envelopes each with its purpose like “bills”, “rent”, or “fun”.

While many no longer rely on printed money, the principle behind this budgeting method still stands: i.e., allowing yourself to spend only the amount that has been put aside and not a penny more.

Goodbudget is an example of a modern budgeting app that uses the envelope effect, allowing you to create different “envelopes” based on your spending habits. Envelopes is another app that takes the same approach.

This is a great option for anyone who finds themselves overspending by accident and/or someone who finds it difficult to think about electronic money without a visual representation.

2. The 50/30/20 budgeting method

The 50/30/20 budgeting method is a popular budgeting philosophy that dictates that you should spend 50% of your after-tax income on needs, 30% on wants, and 20% on savings.

One great thing about this particular budgeting approach is that it dedicates a realistic 30% percentage of your budget to “wants”. If you have found yourself quickly abandoning budgets in the past, it may have been because your budget was too restrictive or simply not fun enough.

The 50/30/20 method is a great option for anyone with a tendency to get discouraged or give up on budgeting.

3. The 80/20 budgeting method

The 80/20 budgeting method states that you should put 20% of your take-home pay into savings (whether it’s retirement, a rainy day account, etc), and use 80% of your income for expenses.

This is a great option for anyone with a comfortable, reliable take-home income who is looking to build a robust emergency fund and won’t feel restricted by being unable to access 20% of their income.

4. The zero-based budgeting method

With zero-based budgeting, you track every dollar you spend within every month or pay period. Unlike the 50/30/20 method, zero-based budgeting is unconcerned with percentages and instead focuses on each individual dollar.

With this method, every spending amount must be planned for, tracked, and justified. Rigid but precise, this approach is great for anyone who is prone to overspending or who wants to feel in complete control of their finances.

Our final thoughts

Budgeting is hard, but before you give up altogether, try to set yourself up for success by choosing a budgeting philosophy that works for you and following the steps to setting up a great budget.

Rachel Cribby

Rachel Cribby is a professional writer, editor, and transcriptionist from Canada. She holds degrees in Creative Writing and Urban Studies from Concordia University.

Frequently asked questions

Do I really need a budget?

Should I use a budgeting app or budgeting software?

What is the point of a budget?

Do I really need a budget?

You do not absolutely need to have a budget—or at least, it’s not illegal not to have one. However, if you are somebody that is dedicated to reaching or maintaining financial stability, you will find it considerably harder to do so without a budget. Not only does a budget help you take the reins on your finances and feel more in control, but it also helps you save money by avoiding overspending. It also helps you to notice patterns in your spending and course-correct where necessary.

Should I use a budgeting app or budgeting software?

Whether or not you use a basic budgeting method such as a notebook or spreadsheet or a type of budgeting software is up to you and ultimately a personal preference. The point of a budget is to find something that you are committed to and can maintain regularly, so it’s important to choose whatever feels right to you. This is ultimately a personal decision, as each method will come with its pros and cons.

What is the point of a budget?

A budget is an organization of your or your household’s income that lays out spending considerations for expenses, debt payment, and savings. The main purpose of a budget is to save you from financial distress by ensuring that you do not overspend. It can also be used to proactively save up for a purchase or vacation or to pay off debt since it allows you to factor in these goals while also accounting for your everyday expenses. A budget is also a powerful way to bring yourself peace of mind.