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Effortless Budgeting: How to Create a Budget In 5 Steps

4 min read

how to create a budget in 5 steps

Written By

Courtney Johnston
Courtney Johnston

If you’re looking to get more money savvy, you’ve probably heard the age-old advice: you need a budget. And the truth is, you do.

In order to reign in spending, bulk up your savings, or pay down credit card debt, you must first know what you’re working with. That’s where a budget comes in handy. A budget can help you determine exactly where your money is going and why you don’t seem to have enough at the end of each payday.

There’s no right or wrong way to stay on top of your budget, but if you’re starting out, there are some guidelines you can follow. Here’s how to create a budget in 5 steps.

Step 1: Figure out your monthly net income

Before you can find wiggle room in your budget, you have to first start with the basics. That includes figuring out your net income or how much take-home pay you bring in each month.

There are a few ways you can do this. You can divide your net income by 12 to get a rough estimate of what you’re working with each month. But depending on how you get paid, this might not be as exact as you’d like.

A more thorough approach would be to look at your pay schedule and determine how much you’ll bring in each month based on your previous paycheques. For example, if you’re paid bi-weekly, you can calculate your monthly net income using a calendar to calculate how many paycheques you’ll receive each month.

Tip: You can also count on two paycheques a month, and in months, when you get three paydays, count that money as a bonus.

If you earn income outside of your primary job from a second job, side hustle, or freelance venture, you should decide if you want to factor this into your budget or consider this additional money to help you build your savings or pay down high interest credit card debt.

Regardless of how you want to calculate your income, make sure it’s after taxes and that the figure is reliable.

Step 2: Track your monthly fixed expenses

Now it’s time to dig into how much money you’ve spent in the past few months. It’s good to look at this data one month at a time. Depending on your bank's digital tools, you can view your expenses by category easily. Budgeting apps can also help you determine how much you spend across set groupings.

But you can do the heavy lifting yourself by reviewing your bank statements to comb through your monthly expenses. Some common expenses you might need to pay monthly include:

  • Rent or mortgage

  • Utility bills (electric, internet, gas, water)

  • Cell phone bill

  • Groceries

  • Insurance (home, rental, auto)

  • Gas

  • Debt (credit cards, car payments, student loans, personal loans)

  • Subscriptions (streaming services, meal delivery kits, music listening apps)

  • Gym membership

  • Travel costs

  • Personal care and home goods

Once you’ve gone through one or two months’ worth of expenses, try to come up with a total per month. You can then use an average to understand how much you regularly are spending on each category.

Step 3: Determine fixed and variable expenses

Now that you know where most of your money is going, you’re going to want to label your expenses as “fixed” or “variable.” This will help you determine where to make adjustments to save more money each month.

What are fixed expenses?

Fixed expenses are generally costs that remain the same each month. In many cases, there are charges you can’t avoid, but they can be nonessential purchases, too. For example, your rent and cell phone bill are two types of fixed expenses. Your electric bill, however, might not be fixed unless you’re on a budget plan. Instead, it might go up or down depending on the time of year.

Knowing which expenses will stay the same each month can help you understand what charges will never change, so you aren’t caught off guard by an expense.

What are variable expenses?

Variable expenses fluctuate. They can be monthly expenses, seasonal expenses, or pop-up costs. In addition to your electric bill, expenses like food or gas might happen regularly but fluctuate monthly. Travel costs might be variable, seasonal, or occasional, happening only a few times a year.

In addition, you might spend more on gifts, travel, food, or gas during the holidays, around a spouse or family member’s birthday, or when your kids are out of school.

Making note of variable expenses can help you in two ways: first, you can use high and low estimates to help you plan for the unexpected. And two, you can determine if you’re overspending in any areas or if you think you could spend less without impacting your quality of life.

For example, maybe you thought you were only going out to eat twice a week but find it’s happening four to five times a week. Scaling back here while still enjoying nights out might help you find extra dollars in your budget.

Don’t forget to include your emergency fund and savings goals

Lastly, be sure to account for any money going towards your savings goals or emergency fund. Even if this money is directly deposited right into a high-interest savings account, it’s important to account for it to keep your budget in line.

Plus, if you want to save money more frequently, you’ll need to know where you’re starting and how much you’re already regularly contributing.

Step 4: Design your monthly budget

Now that you know where every dollar in your monthly income is going, you can start creating your personal budget. You can use a spreadsheet or a budgeting app to help you get started.

Look at your fixed and variable expenses and determine if there are ways to cut back. Should you switch to a more affordable cell phone provider? Maybe you found streaming subscriptions you aren’t using that you can cancel. Or maybe you found unexpected expenses that you didn’t really need to put your money towards. Look for areas to make cuts, and then assign each of your spending categories a fixed monthly amount.

From there, it’s time to track your spending to make sure you stay on track. You might find checking in regularly on your spending activity helps.

Automate savings goals

If one of your goals is to bulk up your emergency savings, make saving even easier by automatically transferring money to a high-interest savings account. Look for a bank account with a high savings rate, cash-back offers, or helpful features like overdraft protection coverage.

For example, KOHO’s hybrid spend and save account offers up to 5% back on your savings, comes with virtual card access, and can help you build your credit. You’ll even get access to your free credit score.

Step 5: Adjust your personal budget as you go

Once your budget is set, be sure to check in on your progress. Your budget isn’t set in stone and should be adjusted to serve your lifestyle and your savings goals.

You might find that you cut back too much in a category you enjoy spending your money in, like restaurant purchases. Don’t limit yourself from enjoying expenses that align with your values. Just focus on ways to reduce the amount you’re spending. For instance, consider making nights out more special by going to one fancy restaurant rather than several less formal eateries. You could save money and find the experience more special.

There may also be times when you want to reign in your spending more tightly to stay on track for a big savings goal, like a down payment for a house or money for a trip overseas. And that’s OK. Be sure to pivot your budget to make sense of the current stage of your life.

Tips to stay on track

Creating a budget can be easier than continuing to follow it. Here’s how to stay on track:

Remember why you’re budgeting

Following a budget requires a lifestyle change. You need to be aware of why you’re making a budget and what you want out of it. You might want to save more money or pay down existing credit card debt.

Whatever the reason, reminding yourself of your ‘why’ can help you stay motivated.

Embrace imperfection

Have you ever tried to follow a diet, slipped up, and then gave up entirely? We all have. Don’t approach budgeting with an all-or-nothing mindset. That’s just an easy way to set yourself up to fail.

Instead, remind yourself that accidents are going to happen. You may face an unexpected car repair that cuts into your savings goal for a new computer. Or you may have a stressful month at work that leaves you ordering more takeout than you accounted for.

Give yourself the grace to slip up occasionally, then get back into your budgeting lifestyle when possible.

Celebrate small wins

Sticking to a budget requires determination and motivation. And you should cheer yourself on when you reach a new milestone. Whether it’s saving your first $1,000 or paying off your first credit card balance in full, every step forward is a big deal.

You can spend a small amount of money to celebrate these wins, like a night out or a movie date. You also don’t have to spend money to celebrate — tell your family and friends about your accomplishments.

But be sure to recognize that you worked hard and achieved a challenging goal.

You don’t have to be perfect but don’t give up

Whether you prefer to use a budgeting app, pen and paper, or a spreadsheet, knowing where your money goes each month can help you free up extra dollars. Use this guide to create a budget and stay on top of your spending to crush your money goals.

Note: KOHO product information and/or features may have been updated since this blog post was published. Please refer to our KOHO Plans page for our most up to date account information!

Courtney Johnston

Courtney is a professional writer, editor and financial literacy enthusiast. You can find her writing on CNET, Investopedia, The Motley Fool, Yahoo Finance, MSN and The Balance. She spends her free time exploring different cities across the globe or enjoy some downtime with her two cats and one dog.



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