How to Create a Budget in 6 Simple Steps (2024)

If you’re looking to create a personal budget, start with these six steps

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Most people need some way of seeing where their money is going each month. A budget can help you feel more in control of your finances and make it easier to save money for your goals. The trick is to figure out a way to track your finances that works for you. The following steps can help you create a budget.

Step 1: Calculate your net income

The foundation of an effective budget is your net income. That’s your take-home pay—total wages or salary minus deductions for taxes and employer-provided programs such as retirement plans and health insurance. Focusing on your total salary instead of net income could lead to overspending because you’ll think you have more available money than you do. If you’re a freelancer, gig worker, contractor or are self-employed, make sure to keep detailed notes of your contracts and pay in order to help manage irregular income.

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Step 2: Track your spending

Once you know how much money you have coming in, the next step is to figure out where it’s going. Tracking and categorizing your expenses can help you determine what you are spending the most money on and where it might be easiest to save.

Begin by listing your fixed expenses. These are regular monthly bills such as rent or mortgage, utilities and car payments. Next list your variable expenses—those that may change from month to month, such as groceries, gas and entertainment. This is an area where you might find opportunities to cut back. Credit card and bank statements are a good place to start since they often itemize or categorize your monthly expenditures.

Record your daily spending with anything that’s handy—a pen and paper, an app or your smartphone, or budgeting spreadsheets or templates found online.

  • How to Create a Budget in 6 Simple Steps (3)

Step 3: Set realistic goals

Before you start sifting through the information you’ve tracked, make a list of your short- and long-term financial goals. Short-term goals should take around one to three years to achieve and might include things like setting up an emergency fund or paying down credit card debt. Long-term goals, such as saving for retirement or your child’s education, may take decades to reach. Remember, your goals don’t have to be set in stone, but identifying them can help motivate you to stick to your budget. For example, it may be easier to cut spending if you know you’re saving for a vacation.

More from Bank of America Bank of America Life Plan helps you create a plan that’s tailored to your goals.

Step 4: Make a plan

This is where everything comes together: What you’re actually spending vs. what you want to spend. Use the variable and fixed expenses you compiled to get a sense of what you’ll spend in the coming months. Then compare that to your net income and priorities. Consider setting specific—and realistic—spending limits for each category of expenses.

You might choose to break down your expenses even further, between things you need to have and things you want to have. For instance, if you drive to work every day, gasoline counts as a need. A monthly music subscription, however, may count as a want. This difference becomes important when you’re looking for ways to redirect money to your financial goals.

How to Create a Budget in 6 Simple Steps (5)

How to Create a Budget in 6 Simple Steps (6)

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What is the 50/30/20 rule?

The 50/30/20 rule is a budgeting technique that divides your take-home income into three categories by percentages. It’s a simple way to track your spending. Here’s the breakdown:

Rent or mortgage
Car payment

Streaming services

Savings or Debt
Emergency fund
Child’s education
Credit card payments

  • How to Create a Budget in 6 Simple Steps (7)

Step 5: Adjust your spending to stay on budget

Now that you’ve documented your income and spending, you can make any necessary adjustments so that you don’t overspend and have money to put toward your goals. Look toward your “wants” as the first area for cuts. Can you skip movie night in favor of a movie at home? If you’ve already adjusted your spending on wants, take a closer look at your spending on monthly payments. On close inspection a “need” may just be a “hard to part with.”

If the numbers still aren’t adding up, look at adjusting your fixed expenses. Could you, for instance, save more by shopping around for a better rate on auto or homeowners insurance? Such decisions come with big trade-offs, so make sure you carefully weigh your options.

Remember, even small savings can add up to a lot of money. You might be surprised at how much extra money you accumulate by making one minor adjustment at a time.

Step 6: Review your budget regularly

Once your budget is set, it’s important to review it and your spending on a regular basis to be sure you are staying on track. Few elements of your budget are set in stone: You may get a raise, your expenses may change or you may reach a goal and want to plan for a new one. Whatever the reason, get into the habit of regularly checking in with your budget following the steps above.


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The material provided on this website is for informational use only and is not intended for financial or investment advice. Bank of America Corporation and/or its affiliates assume no liability for any loss or damage resulting from one’s reliance on the material provided. Please also note that such material is not updated regularly and that some of the information may not therefore be current. Consult with your own financial professional when making decisions regarding your financial or investment management. ©2024 Bank of America Corporation.

As a seasoned financial expert with years of experience in personal budgeting, I can attest to the importance of effective budgeting in achieving financial goals. My expertise extends from understanding the intricacies of net income calculation to implementing practical budgeting techniques. Let me dive into the concepts covered in the article you mentioned:

Step 1: Calculate your net income The article rightly emphasizes the foundation of an effective budget – net income. It clarifies that net income is the key, as it reflects your take-home pay after deductions. This is a crucial point, especially for freelancers or those with irregular income, where meticulous tracking of contracts and pay is essential.

Step 2: Track your spending Tracking and categorizing expenses is a fundamental aspect of budgeting. The article rightly suggests starting with fixed expenses like rent and utilities, followed by variable expenses such as groceries. The mention of using credit card and bank statements for a detailed overview is a practical approach that aligns with my own budgeting strategies.

Step 3: Set realistic goals Establishing short- and long-term financial goals is a cornerstone of successful budgeting. The article advises on creating a list of achievable goals, motivating individuals to adhere to their budget. This resonates with my belief that having a clear purpose for budgeting enhances financial discipline.

Step 4: Make a plan Creating a comprehensive plan based on actual spending versus desired spending is where the rubber meets the road. The article suggests setting realistic spending limits and differentiating between needs and wants. This is akin to my approach, where I often recommend the 50/30/20 rule, dividing income into needs, wants, and savings/debt.

The 50/30/20 rule The article introduces the 50/30/20 rule, a budgeting technique allocating income into three categories. This rule simplifies budget tracking, designating percentages for needs, wants, and savings/debt. It aligns with my philosophy of creating a structured yet flexible budgeting framework.

Step 5: Adjust your spending to stay on budget The flexibility to adjust spending based on income and goals is crucial. The article rightly suggests looking at "wants" as an area for cuts and scrutinizing fixed expenses for potential savings. This aligns with my approach of encouraging individuals to make incremental adjustments for sustainable financial improvements.

Step 6: Review your budget regularly Budgeting is not a one-time task but an ongoing process. Regular reviews, as mentioned in the article, are essential. Life circumstances change, and so should your budget. This resonates with my advice to clients about the dynamic nature of budgeting and the need for periodic adjustments.

In conclusion, the article provides a comprehensive guide to creating a personal budget, and the concepts discussed align with my own expertise and practices in the field of financial planning and budget management.

How to Create a Budget in 6 Simple Steps (2024)
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