How to Create A Budget and Stick To It: 5 Steps

Short Answer: Creating a budget requires some strategies and consistent adjustment, but you can take control of your finances with these simple steps!

You've probably seen the headlines about football players or movie stars going broke after earning hundreds of millions of dollars. Your long-term financial health is less about how much you earn than what you do with it. That's where budgeting comes in.

Outlining how much you make and where you can spend that money is essential to budgeting basics to ensure a strong financial future. While the task might seem daunting, when you break it down into steps, it’s simple and provides valuable insights that ensure you’re meeting your financial goals and closing gaps in your finances. Here’s a step-by-step guide for how to budget in 2024.

How to Make a Budget in 6 Steps

Armed with information on budgeting and saving money, you’re ready to go through the motions and start building a realistic budget based on your needs and income levels. Follow these steps to make a budget and start taking control of your finances this year. 

1. Assess Your Income 

To create a budget, start by understanding your income. This includes income from traditional jobs as well as side hustles. While some side hustles don’t offer consistent income, you can use the lowest amount you make with your side business each month as a guide. Add them together, and this will be the baseline for your budget.

2. Track Your Essential Expenses

Now outline necessary expenses, such as mortgage payments, loan repayments, or car payments. Next, you need essential household expenses required to live. This includes housing, food, medical care, insurance, transportation, and utilities. Again, these items can fluctuate month to month, so input an average of what you’ve spent for the past 12 months as your guide.

While groceries are another essential category, they offer a great deal of flexibility. For example, you don’t need organic food or gourmet salads to live, but perhaps you enjoy occasionally having them on your menu. To set your grocery budget, you should consider your everyday spending and total income.

And you certainly don’t need cookies or treats to nourish your body, but they make life enjoyable. Be realistic about how much money you need to spend to survive and then add some padding for those items that make life enjoyable if you have the funds to add flexibility.

3. Track Discretionary Expenses

Finally, you must know how much you spend on optional fun categories, such as eating out, entertainment, and other discretionary activities. Your entertainment budget should include all streaming services and digital commitments. As you outline these commitments, you might spend more than you realized in these areas and need to make some tough choices. This is the area where you can typically save the most. 

To track expenses, you can review your credit card and bank statements from the last few months to ensure you didn’t leave anything out, such as ongoing vet bills for your pet or other expenses unique to your household. Some expense trackers and budgeting apps will also do this for you automatically. You can also find Mint alternatives here.

4. Pick a Budgeting Plan

The first step to creating a budget is to decide on a budgeting plan. Standard budgeting methods to consider include: 

• Zero-based budgeting plan: You'll allocate funds based on current needs within each new budgeting period. 
• 50-30-20 rule: You allocate 50% to necessities, 30% to discretionary, and 20% to savings. 
• 70-20-10 rule: In this variation, you'll use 70% for essentials, 20% for an emergency fund and savings, and 10% for discretionary spending
• The envelope system, also called cash-stuffing, is a budgeting method in which cash is withdrawn and allocated to budget categories in envelopes. 
• Pay yourself first: While not a complete budgeting method, this system requires you to pay out for your savings goals first and then divide the remaining funds between other priorities. 
• Incremental budgeting: Use last year’s expenses and reduce them by a percentage to get to this year’s budget based on your goals.
• Cash budget: Anticipate payables and receivables to come to a total amount required for the year.
• Value-based budgeting: Start with the most critical expenses you must meet and then put money in the places that matter most to you, such as travel, to find a way of life that fits your income but matches what you value.

You should use trial and error to determine what makes the most sense and makes budgeting manageable for your daily life. Here are some frameworks to consider.

5. Set Financial Goals

Once you have an excellent idea of your spending needs, you’re ready to outline your financial goals and use your chosen budgeting method to achieve them. 

You can divide your financial goals into three main categories:

• Emergency fund: This should be the first savings fund you build. You can use this money for unexpected expenses like an illness or medical condition, vehicle or appliance repairs, and other unexpected costs. 
• Short-term: This can include a home renovation, new tires for a vehicle, updated appliances, or a vacation.
• Long-term: Long-term goals include retirement, a house, or (future) new vehicles.

You should set savings goals in each category to care for your financial well-being and help you live how you want to. Aim to prioritize building savings before discretionary expenses to increase your long-term savings. 

6. Apply Your Plan

No matter your budgeting method or framework, it's time to implement. You’ll need to evaluate what spending subcategories are most important to you. Prioritize those categories and put realistic numbers there. You might use budgeting percentages to outline how much of your income goes into each category or use actual dollar amounts.

Once you’ve allocated your funds and ensured you aren’t planning to spend more than you make, you’re ready to start tracking your monthly expenses. The most significant step in building a budget is to apply and stick with it. 

As you get into budgeting, you might find some numbers you’ve entered unrealistic. You’ll need to adjust accordingly from one month to the next to keep your budget workable. To maintain the long-term budget, you can change it from month to month, as long as you're not taking from savings. For example, if you overspend on your food budget but come under on entertainment, you can take a little from entertainment so both categories are balanced. 

You’ll input actual expenses each month and compare them with what you allocated in that category. This will help you better understand your spending and make lifestyle adjustments to match.

7. Review Your Budget

After creating the budget, you’ll need to reevaluate it regularly. Each month, you might notice minor changes you need to make, or a life event might call for a full overhaul, such as moving, welcoming a child, or changing jobs.

Then, there are annual pay raises, which can also call for changes to your budget or how you want to allocate the new funds, especially considering long-term savings goals. For the best results and to meet financial goals, you can give your budget a light review each month and a full overhaul annually.

Why Making a Budget Is So Important

There are so many benefits to making a budget! It allows you to reach more financial goals, become more conscious of your spending habits, and take control of your finances. Other benefits of making a budget include:

• Reduce debt exposure
• Plan for emergencies
• Stops overspending
• Creates accountability
• Get more control over your money
• Better prepare for retirement

Helpful Tips for Sticking to Your Budget

Getting started with budgeting basics can be challenging, but it’s also worthwhile. Consider these tips for staying motivated to reach your goals and being disciplined in your spending.

• Create a support system: When you surround yourself with people who respect your budget, you’ll feel less tempted to go on a spending spree. For example, having friends who know and appreciate that you don’t want to go to a fancy restaurant every month can reduce the temptation and peer pressure. Better yet, find an accountability partner. 
• Celebrating small milestones: When you hit a savings goal or accomplish a short-term financial milestone, recognize and celebrate that success. When getting started, success might be your first month you don’t go over in any spending category. Years into the process, a milestone might be purchasing the vehicle you’ve always wanted with minimal financing.
• Use an app: Budgeting should be a smooth process. Many apps allow you to connect your financial accounts in one place and see income versus expenses quickly and easily.
• Manage stress: While a day at the spa can relax and help you decompress from a stressful project at work or a busy period at home, it’s also expensive. Look for ways to manage stress that fit within your budget so you don’t become an emotional spender. Retail therapy is also dangerous for your budget, so find ways to spend your time that you still find entertaining and enjoyable but put less strain on your budget.
• Break big financial goals into smaller ones: It can feel impossible when you’re working to save tens of thousands of dollars toward something like a home down payment. Set smaller goals that you can achieve each year to stay motivated and focused on the goal. That way, when you save $10,000 per year for the next six years, you know you’re one step closer to your dream home and your goal.
• Find free activities: By finding more activities that you enjoy that are either free or low-cost, you can make it easier to stick to a budget without missing out. Check out local parks and nature preserves, free concerts in the park, free museum days, and other local activities. 

In addition to these tips, there are some common budgeting mistakes to avoid, such as:

• Failing to track expenses
• Failing to prioritize the most critical expenses first
• Overspending in categories of want instead of need
• Failing to adjust your budget as your circumstances change
• Putting too little in a budget category, especially for expenses that fluctuate
• Leaving out seasonal expenses, such as holiday presents or summer vacations
• Buying things on credit that you can't afford
• Struggling to account for jobs that have irregular income and building a more conservative budget

Maximizing Your Budget

Budgeting money is simple and minor mistakes are part of the process. What counts most is consistency. Persistence is your best friend in long-term budgeting and reaching your financial goals. Get your family and friends on board so you can support each other. You can also find more budgeting tips for young adults. But sometimes, your budget needs a cash infusion. In that case, you could get $1000 to $5000 fast by learning these strategies. 

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