How To Start a Budget in 7 Steps

By Indeed Editorial Team

Updated October 5, 2021 | Published February 25, 2020

Updated October 5, 2021

Published February 25, 2020

A budget is a record of how much money you’re taking in and how much money you’re spending. Keeping an accurate budget can help you plan for short- and long-term goals and spend only on items that you need and can afford. In this article, we explain why budgeting is important and how you can start a budget in seven simple steps.

Why is budgeting important?

Following a budget can help you pay off debt and make calculated financial decisions. It can also help you save money that can be put toward special purposes, travel or leisure activities.

Read more: Why Budgeting Is Important (Plus 7 Benefits of Budgeting)

How to start a budget

Follow these seven simple steps to start a budget that will help you reach your short- and long-term financial goals:

  1. Calculate your income.

  2. List your spending.

  3. Set your goals.

  4. Choose a budgeting strategy.

  5. Adjust your habits.

  6. Automate your savings and bills.

  7. Track your progress and revisit as necessary.

Related: Free Budget Worksheet

1. Calculate your income

The first step in starting a budget is to determine your net income—or your take-home pay after tax deductions. You should include income from your full-time job, freelance work and any other sources, such as investments. It can be helpful to divide your net income into monthly amounts to prepare a more accurate budget.

Related: How To Make a Budget Plan in 6 Steps

2. Make a list of your fixed expenses

Begin by listing all of your fixed expenses, such as mortgage or rent, car payments and student loan payments. These are expenses that stay the same each month. After you have listed these expenses, make a separate list of your flexible expenses, such as dining, entertainment, travel, groceries and other optional expenses that may vary from month to month. Check your credit card and bank statements and add in other expenses, such as taxes and insurance, which may be billed annually, semi-annually or quarterly.

3. Set realistic goals

Make a list of both short- and long-term financial goals you want to accomplish. Short-term goals, like saving for a vacation, should take a year or less. Long-term goals, such as saving for retirement or your child's college education, are goals that will take years to accomplish.

Identifying your goals will make it easier to follow your budget. For example, it can be easier to decrease your spending if your short-term goal is to reduce credit card debt. But remember to be realistic about how much money you can save each month or put toward debt. Having realistic goals will also keep you from over-spending on things that aren’t essential.

Related: How To Create a Personal Budget in 6 Steps

4. Choose a budgeting strategy

There are many budgeting strategies, but it's important to find the one that’s right for you. Some of the more common budgeting strategies include the envelope system, the zero-based budget and the 50/30/20 budget:

  • Envelope system: This strategy is best for beginners because it only budgets for one month at a time. With this system, you take a few envelopes and write what you plan to buy on them—groceries, rent and other expenses. Then, you put the money you expect to spend on each expense in the envelope. When the money is gone, you can't spend any more.

  • Zero-based budget: Also called the “zero-sum budget,” this is a popular option that justifies each dollar you spend. All your money goes to expenses, savings and debt payments. In this way, it is similar to the envelope system. If you have money left after all your expenditures, you either assign it to next month's budget or allocate it to another category.

  • 50/30/20 budget: In this system, no more than 50% of your income goes to needs, no more than 30% goes to wants and at least 20% goes to savings and debt repayment. This budgeting system is best for a long-term plan. It allows you to have manageable debt, occasional indulgence and savings to pay irregular or unexpected expenses. This budget is popular for many people, as it's easy to set and follow.

5. Adjust your habits

Once you assess your income and spending, consider adjusting your habits to meet your budgeting goals. In many instances, there are ways to reduce or eliminate spending to fit into a budget, even if it's for a short amount of time.

For example, if you buy coffee five days a week at $4 per coffee, you're spending $20 per week on coffee. Over the course of a year, that's more than $1,000. If you stop buying coffee or reduce the days you make the purchase, you can put that money toward other financial goals.

Related: How To Ask for a Raise (With Script Examples)

6. Automate your savings and bills

One way to stick to a budget is to set up auto-pay on fixed expenses, such as utilities and cell phone bills and auto-deposit on your savings account. Automated payments can help you stay on budget since they can reduce the temptation to overspend.

Many payroll systems allow you to set up your paycheck to automatically deposit in different accounts, meaning you can send some money to both your checking and savings accounts. Some companies also offer discounts when you set your account to auto-pay, saving you additional money.

7. Track your progress

Your budget will likely change over time depending on your salary and financial goals, so it’s important to regularly review your allocations.

For example, if you get a raise, you can increase the amount you send to a retirement account. If you pay off a debt, you can reallocate that money to savings or a new goal. Reviewing your budget whenever you reach a financial milestone can help you focus and achieve long-term financial goals.

Read more: Eight Budgeting Methods To Help You Save

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