Girl budgeting and grabbing burgers from food truck.

How To Make A Budget

Matt Cardwell6-Minute Read
UPDATED: July 26, 2023


Understanding how to make a budget plan is one of the first steps to securing financial freedom. Whether your goals are to save for a family vacation, pay off debt or move into your dream home, creating a budget can help you make these goals become a reality.

Below, we’ll break down the steps to making a budget that works for you and your situation. This will include modifying common budgeting styles to help you find one that you’ll want to stick with.

How To Create A Budget In 6 Steps

No matter which method you use, making a budget – at its core – involves following the simple framework detailed below.

1. Track And Calculate Your Expenses

This first step to budgeting is understanding where your money goes. It’ll be hard to determine a monthly savings plan if you don’t understand how you’re allocating your funds.

Separate your spending into fixed and variable expenses. A “fixed” expense is typically the same amount every month – like a mortgage, rent, car payment and certain utilities. A “variable” expense is less predictable – like groceries, gas and the tab at dinner.

You don’t need a complex system to track your expenses; check your bank or credit card statements to help determine what you spend each month. Don’t forget to look at any investment accounts or automated savings you already have, and check your bills for any fixed expenses.

Ideally, you want to come up with 3 months’ worth of expenses so you can get a better picture of the average expenditures in certain categories. For example, if you spent $100, $200 and $150 on gas in October, November and December, then you can estimate that you spend about $150 each month.

Do the same with other spending categories, including monthly debt such as credit card payments.

2. Find Your After-Tax Income

Figuring out your net income is simple if you have a full-time job. Take a look at your pay stubs or bank statements if you have direct deposit. Add in any deductions you make for health insurance, life insurance and retirement savings so you have an idea of what you’re spending.

If you have multiple sources of income (such as self-employment or income from side hustles), add them all together and subtract any business expenses and taxes you’ll need to pay.

By getting a general spending overview, you’ll recognize the categories where you’re prioritizing your wealth and learn whether you need to cut spending or start rearranging your funds.

3. Determine Your Savings Goals

Sit down and take a look at what’s going on during the next few years. Do you have any financial goals or milestones you want to reach? For example, let’s say you’d like to surprise your spouse with a trip to Paris on your 10th wedding anniversary by the end of next year. Or maybe you’re looking to buy your dream house in the next 5 years.

Take this time to look at how much it’ll cost you to achieve these goals. Then break it all down. Maybe the trip to Paris will set you back $5,000. So how much will you need to set aside each month to pay for it in a year? For your dream home, is it realistic to save up for a 20% down payment within the next 5 years?

If you have loans you’re paying off, take this time to write them down, including the minimum payments and how much you’ve been putting toward them. How much can you save each paycheck without going into any debt?

4. Calculate Your Total Income And Expenses

Add up all your expenses, plus money you want to set aside for savings goals, and compare it with your take-home pay.

If your expenses exceed your monthly income, it’s time to figure out how to trim your expenses to free up some savings. If there’s extra money, decide where to allocate the rest of the funds.

5. Make A Budget Plan

Once you’ve determined what you spend each month and how much you could realistically save, it’s time to put a plan into action. A few known methods are available for you to choose from, depending on your money management style. We’ll get into more detail about different budget plans in the next section.

6. Track Your Progress And Refine As Needed

A budget isn’t a static entity – it can vary depending on your circumstances. Maybe you got a raise and now need to figure out where to allocate the extra cash, or maybe the holidays are coming up and you need to set aside some savings for gifts.

This is why it’s helpful to revisit your budget month to month, compare it with how much you spent (find an easy way to track your spending) and adjust if needed.

Once you get the hang of budgeting and setting spending limits, you should begin to see a difference in how much you save over a period of time.

Types Of Financial Budget Plans

As mentioned, a few proven methods can help you be even more disciplined in your savings. Let’s look at how some of them work.

The 50/20/30 Rule

The 50/20/30 rule represents the percentage of your income you should allocate for certain items in your budget – 50% should go toward your necessities, 20% toward savings, and 30% toward your wants.

So the majority of your budget should be dedicated to items like housing, food, insurance and transportation. The part allocated toward your savings also includes any debt repayment, such as car loans and credit card bills. The rest then can go toward extras like vacations and hobbies.

The Envelope System

With this classic saving method, you keep your allocated spending money in physical envelopes marked for their particular spending category. Once you’ve spent all the money in an envelope, that’s all you can use for that category that month.

This method may not work as well for monthly bills, because those may not be payable in cash. 

The Two-Account Plan

The two-account method is as it sounds: You split your monthly expenses between two bank accounts. One account is for fixed expenses, and you use the other for your variable expenses. This way, you’ll always have enough money set aside for your fixed expenses, along with another account to use at your discretion.

Start by adding up all your fixed monthly expenses and dividing the amount by the number of paychecks you receive a month. Deposit that amount into one of your two accounts and keep the rest for your cash or debit card purchases.

Zero-Based Budgeting

This method is most suitable for someone who’s detail-oriented and has been budgeting for some time. Zero-based budgeting involves calculating your take-home pay into exactly what you need to cover your monthly expenses and putting everything else into a savings account. By the end of the month, you shouldn’t have any spending money left over.

Because life can be unpredictable, you should still keep an emergency fund in case of unexpected expenses.

How To Make A Monthly Budget Plan Work

Creating a budgeting system might be easier than actually putting your plan into action. Consider these tips to stick to your budget and get closer to your financial goals.

Be Smart With Your Credit Cards

If you have to use your credit card, make sure it’s for an amount you can repay by the next month. Getting into credit card debt can complicate your budgeting goals by adding another monthly expense.

Choose The Right Budget Plan For You

No one budgeting plan works for everyone. Systems like the two-account or zero-budgeting plan may be too regimented for some, and the envelope plan could leave you short some funds if your math is off. The 50/20/30 rule is known for its simplicity and flexibility but still may not suit your circumstances.

If none of these plans is right for you, try coming up with one. No one knows your situation better than you.

Use A Budget Sheet Or App

Take advantage of technology to help stick to your budget. Instead of the traditional pen and paper, use a budget spreadsheet to input your monthly expenses and savings, or utilize a budgeting app like Mint, You Need A Budget or Truebill.

You may also feel free to use any of our free, printable budgeting sheets:

Final Thoughts

Achieving financial freedom is possible once you know how to budget money. Sort through your monthly expenses and see what you can afford to set aside, and then put your budget plan in motion. It may take some adjustment, but if you stick to your plan, you’ll almost certainly see a difference.

For additional budgeting tips, check out these ideas for tackling your finances.

Ready To Improve Your Financial Life?

Apply for a personal loan today to consolidate your debt.

Matt Cardwell

Matt Cardwell is Editor-in-Chief and leads the Rocket Publishing House at Rocket Mortgage. During his nearly 15 years with Rocket Mortgage, Matt has occupied a diverse array of Marketing leadership roles, including leading and growing the company’s early digital and internet marketing efforts; Vice President of Marketing; Director of Social Media and Director of Business Channel Strategy.