How to create a budget

You’ve heard it before — a budget is a crucial step on the path to financial stability. But what does that really mean and where do you begin? If you’re stumped on how to create a budget, fear not — we’re here to help.  

While learning how to create a budget is important, not everyone knows how to do it. Read on as we help outline the steps to take to create a personal budget.  

How to create monthly budgets — and why they’re important 

Before we get into how to create a monthly budget, we’ll outline why it’s important for your financial and personal wellness. The main reason to create a personal budget should be to gain control of your saving and identify your spending habits. A realistic budget will help you create an emergency fund, pay off debt, and prevent overspending. 

Sticking to a budget has major benefits. You’ll be able to deal with unexpected expenses without having to assume credit card debt, or without having to take on (more) debt. You’ll be able to save for long-term and short-term savings goals. Most importantly, having a budget and having control over your financial situation will bring you peace of mind and reduce stress. 

Speaking of sticking to your plan… See how Spruce mobile banking features can help you along the way!  With Spruce you can choose to earmark money for saving goals that you create and take advantage of cash back reward options to help boost your savings.

Spruce fintech platform is built by H&R Block, which is not a bank. Bank products by Pathward®, N.A., Member FDIC.

How to create a budget plan  

Now that you know the importance of having a budget, let’s get into how to create a budget plan. Although it sounds daunting, there are some simple steps that will get you there. 

1. Calculate your monthly income and expenses   

First, calculate your total income and expenses. Gather your financial information for the past several months, such as bank account statements, paystubs, investment accounts, credit card bills, important receipts, mortgage or rent statements, car payments, and other bills (including those for fixed expenses or variable expenses). We’ll break them out further below: 

• Calculate your income, focusing on your take-home pay. This means your net pay (after taxes and any benefits are removed on your paycheck), not your salary. Be sure to include other income sources, such as social service assistance or any side job income.  

• Determine your average monthly expenses. This includes your mortgage or rent, home utilities, car payments, gas, food, clothing, insurance, savings, childcare, pet expenses, and entertainment. Using your bank’s website and other financial documents mentioned above, determine the average monthly cost for each of these expenses. You should also create a miscellaneous category for the expenses that don’t fit in any other category. 

2. Analyze your monthly expenses   

Now that you’ve accounted for your monthly income and living expenses, you can step back and take stock of your financial situation. Use a spending tracker or create a budget worksheet to see a clearer picture of your situation. If you find that you’re spending more than you realized or even more than you make, you’ll want to find areas where you can reduce your spending. (Tip: Check out Spruce’s budget tracker tool.)

Deciding which expenses you’re able to reduce or eliminate is an important step toward developing a budget you can stick to. First, consider your non-essential spending. Non-essential spending items include eating out at restaurants, subscription services, entertainment, and spending on items like home electronics. Do you subscribe to six different streaming services?  Maybe you mainly use four of the services. That’s an area where you may be willing to cut back.  

If cutting out all non-essentials is not enough to balance your monthly budget, you may need to consider larger steps like taking on a second job or changing your living situation. 

3. Use the 50/30/20 rule or another budgeting method 

You need to determine how you are going to break up your income for your various expenses and keep your expenses less than your income from month to month. Remember, a budget’s primary purpose is to keep your spending in check. There are a variety of budgeting methods that will help you do this:  

• The 50/30/20 rule is a popular budgeting method. This budgeting guideline specifies that half of your net income (after tax and benefits are removed) go to essentials, 30% to non-essentials like entertainment, and 20% to savings and debt reduction. 
• If the 50/30/20 rule is too challenging given your current financial situation, there are variations including the 70/20/10 rule or the simpler 80/20 rule (80% for all spending and 20% towards savings/debt reduction). 
• Another option is the “pay yourself first” method. This is a top-down approach that prioritizes savings and reducing debt. You create savings goals for different categories — emergency funds, retirement, large purchases, etc. — and subtract the total from your monthly take-home pay. The remaining monthly income is used for all essential and non-essential expenses. 

Let Spruce help you be better with money

Now that you know a bit about how to create a budget and stick to it, you’re ready to start on your budgeting journey and take charge of your finances. With features such as saving goals, overdraft protection^{Disclaimer number6. Go to disclaimer for more details.}, and cash back rewards^{Disclaimer number1. Go to disclaimer for more details.}, Spruce can help you be better with money day by day.

Find out more about all the features Spruce has to offer. 

Get started with Spruce today!

This information provided for general educational purposes only. It is not intended as specific financial planning advice as everyone’s financial situation is different.