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How Do You Make a Budget for Beginners (that’s realistic!!)

Wondering how to make a budget? I’m pretty sure you’ve asked yourself this question before. After all, you wouldn’t be here if you hadn’t.

Having a budget is super important for keeping your finances in check and hitting your money goals. But here’s the thing: not everyone gets it right (and some don’t know where to start). Well, that’s about to change!

Here are four simple steps to help you make a budget that fits your life.

1. Determine your net income

When making a budget, it’s crucial to first figure out your net income or take-home pay.

Many individuals make the mistake of using their gross income as the starting point for their budget. However, your gross income doesn’t account for payroll deductions like taxes, so it’s not an accurate representation of your actual income.

To calculate your net income, review your paychecks to determine the amount you bring home. If your income tends to fluctuate due to tips, commission, or flexible hours, base your calculations on a worst-case scenario.

For instance, if you’re certain your monthly income won’t dip below $3,000, begin your budget with this figure.

2. Track your spending for “needs”

To make a budget, it’s also important to differentiate between needs and wants, and then figure out how much you spend on these each month. Don’t guesstimate! 

Needs are expenses that “aren’t” optional, such as rent or mortgage payments, insurance, utilities, transportation, food, and minimum debt payments. Tracking your spending is the best way to understand these costs.

Certain expenses like housing and insurance tend to be consistent from month to month, making them easier to track accurately.

Variable expenses, on the other hand, can change from month-to-month. These include utilities, food, and transportation. Review your statements from the previous one or two months to get an average cost.

3. Calculate the percentage of income spent on needs

Once you’ve tracked your “need-related” expenses, the next step is to calculate the total cost of all your needs and then divide this number by your net pay. This reveals the “percentage of income” that you’re currently spending on needs.

For instance, if your needs add up to $2,450 and your take-home pay is $5,500, this means you’re spending 44% of your net pay on needs.

This is need-to-know information.

Knowing the percentage you’re currently spending on “needs” determines how much you’re able to allocate for wants, debt repayment, and savings.

The popular 50-30-20 budgeting rule suggests spending no more than 50% of your net income on needs; 30% on wants; and 20% on savings and debt repayment. But depending on your circumstances you’ll need to adjust this rule.

For example, if you’re currently spending 44% of your income on needs, a more realistic budget might be a 45-30-25 split.

But let’s say your numbers are higher. Instead of your needs adding up to $2,450, they add up to $3,800. In this scenario, you’re spending 70% of your net pay on needs. Therefore, a 70-20-10 split is more suitable.

4. Track your spending for “wants”

After determining the percentage of income you’re spending on needs, it’s time to focus on wants.

“Wants” include discretionary expenses that “are” optional, such as recreation/entertainment, eating out, shopping, self-care, subscriptions, gym memberships, and hobbies.

Now, here’s where things gets interesting.

Let’s say you’re following the 70-20-10 budgeting rule, meaning you’re currently spending 70% of your take-home income on needs. Under this plan, you shouldn’t spend more than 20% of your take-home income on wants (which is $1,100 on a $5,500 salary).

But after crunching the numbers, you might discover that you’re spending more than $1,100 a month – maybe $1,600, which is 29% of your take-home income.

If so, this likely explains why you’re struggling to save money or pay down debt.

To make a 70-20-10 budget work, you’ll need to reduce spending on wants. Once you do so, everything should fall into place, meaning you’ll have money left to pay down debt, build an emergency fund, invest, or start a sinking funds account.

To recap, the steps to make a budget include: 1). Determine your net income and use this as the starting point of your budget 2). Add up how much you’re spending on needs 3). Calculate the “percentage of income” you’re spending on needs, 4). Based on this percentage, allocate a “reasonable” amount for wants, which will result in almost always having money left for savings, debt repayment, and other goals.

How Do You Make a Budget for Beginners FAQ

What is a budget?

A budget is a plan for managing your money. It tracks how much you earn and spend, making sure you don’t spend more than you make. With a budget, you can set goals and see where your money goes each month. It’s like a roadmap for your finances, helping you stay on track and reach your financial goals.

How do you make a budget for beginners?

To make a budget, determine your net income and use this as the starting point. Next, add up all expenses in your “needs” category, and then divide this by your net pay to figure out the percentage of your income used for needs. Based on this percentage, decide a “reasonable” amount to spend on “wants.” For example, if you’re currently spending 70% of your net pay on needs, a reasonable budget might be 70/20/10 (70% on needs; 20% on wants; 10% on savings and debt repayment).

Why budgeting doesn’t work for everyone?

Budgets don’t work for everyone because some people don’t understand the basics of budgeting. They struggle to accurately track expenses and set realistic spending limits. Additionally, unexpected expenses or irregular income can make budgeting difficult. Personal habits and attitudes towards money also play a role.