How to make a budget – the best for you

To create a budget, follow 4 steps: identify your income, define your expenses, deduct expenses from income and finally track and adjust.

Table of Contents

That’s it? Well, that is the essence of 2 weeks of effort in web research. Besides, this is the budget method I use and have been refining for months.

The Gist (“Too Long Didn’t Read” version of the article)

4 steps to make a budget
4 steps to make a budget

A successful budget is one you stick to and that helps you reach your goals. So, here below you can find 3 requirements to create your best budget and the decomposition of the 4 steps to create a budget.


  1. Know your why
  2. Use the least time needed
  3. Adapt the budget to your preferences


  1. Identify your income
  2. Define your expenses (grouped in categories)
  3. Deduct expenses from income
  4. Track and adjust

Requirements to create your best budget

#1 Know your WHY

This is the most important step. Writing why you want to budget will remind you your goals. Because a budget is not supposed to be painful. It is a tool to reach your financial goals. Objectives are diverse like getting the most of your money, finding money to pay bills, becoming debt-free, or making a down payment to buy a house or car.

If you don’t know where your money goes, even paying bills can be stressful due to the fear of not knowing if you have enough money to pay them. Approximately 64% of Americans report feeling stressed about money . That, according to the American Psychological Association’s 2020 Stress in America survey [1]. To avoid such stress, you can create a budget. It shows what you are doing with your money. Then, you can stretch your income as far as it can go with frequent budgeting.

#2 Use the least time needed

An effective budget involves discipline, planning, and prioritization. After knowing your “Why”, the discipline needed can be easier achieved when making a budget is as automated as possible. You can retrieve your bank account statements or even link your bank accounts to a budgeting app. That enables automated transaction identification. Then, the budget can take as little as 10 minutes or less. And the less time it needs, the faster you will do it without interfering with other of your activities.

#3 Adapt the budget to your preferences

Budgeting is not one size fits all.

  1. Pick your preferred tools Choose the one you are already using and that you like:
    • Spreadsheet (Excel/Google Sheets/LibreOffice/OpenOffice)
    • Budget App
    • Web version
  2. Do you prefer cash and visual/tangible budgets? If that is the case you might prefer using envelopes. Each envelope is an expense category. If you spent all you planned in a category (envelope), you must take from another envelope (another category). Keep an eye on this as it can become labor-intensive.
  3. Is your income irregular?

Monthly income can vary due to reasons like having a commission-based income, or varying hours worked in an hourly-paid revenue.

Aim to cover your mandatory expenses in a given month with your lowest monthly income in the last 3 months. If that is not possible, use the average of the last 3 months and save as much as possible for next month. Consider saving and earning more to avoid running out of money.

Steps to create a budget

Step #1: Identify your income

Have your last-month bank account statements. The money transferred to your account should be your after-tax income. Any money you receive is income. It includes bank transfers, cash payments, cash gifts, etc. If your income is not always the same amount, consider the lowest of last 3 months as explained in Requirement #3 Adapt the budget to your preferences. Once you know your income number, let’s define your expenses.

Step #2: Define your expenses

Zero-based budgets is one of the tools used by enterprises that can also be used by individuals. As Deloitte states in its 2020 Global Cost Survey [2]. A zero-based budget doesn’t mean you will have 0 on your bank account. It means that every cent has a category assigned. Hence, you budget all your money. For spending lovers, you could include guilt-free expendable money in a dedicated category.

Name your expense categories

One common method is the 50/20/30 rule. It states that you should budget your income in 3 expense categories:

  • 50% for needs. Including what you can’t live without like food, shelter, utilities, and transportation. This food category does not include eating out in restaurants. You can reduce food expenses with:
    • A meal plan to define what you need
    • A grocery list to avoid impulsive buying
    • Cash for groceries. Like that, you see the spending done
    • Discount grocery stores like Aldi or Lid’l
    • Generic products bought instead of more expensive branded ones
    • Coupons (it helps only if you were going to buy the product anyway)
  • 20 % for savings and debt payment
  • 30% for wants. If “wants” are missing you would experience a minor inconvenience. “Wants” are things you desire but can live without them. For example subscriptions to TV cable, magazines, gym memberships, phone, and internet unless you use them for work. Include in this percentage a “generic” category for an expense you might forgot you could have.

To adapt that method and know your real percentages, you need to look back and forward.

  1. Looking back and identifying previous expenses Your last month’s bank statements were already taken in Step #1: Identify your income. Those will be vital to identify what you spent on.
  2. Looking forward and detecting planned expenses Common planned expenses are vacations, children’s education expenses, and anniversary gifts. Consider expenses for the current year only. For instance, if you plan to spend $1,000 for Christmas and you start budgeting in June, then put aside $170 each month. Include a cushion of around $100 to $200 on first-month budget. Keep it in your bank account and not expect to spend it.

You can access a budget template I prepared and you can see it’s web published version.

Avoid using too many categories. Too granular categories mean much more effort and you want to avoid making budgeting so complex you end up not having the time to do it

Budget Overview
This is the empty monthly budget for you to use freely

Step #3: Deduct expenses from income

After subtracting your expenses from your income, do you have a positive or a negative number?

Positive result

It lets you assign more money to reach your goals. Please consider what you defined in Requirement #1: Know your WHY and prioritize savings/debt payment category. In this way, you will have every cent allocated to a purpose and reaching a zero-based budget. First, ensure you covered the following objectives. Then you can continue to put more money towards other objectives:

  1. Start an emergency fund: Save until reaching $1,000 or ¼ of your monthly expenses. This will keep you covered in case of emergency without jeopardizing your budget. Once built, it will convert what could have been a financial crisis into an inconvenience because you can use your emergency fund. Once spent, rebuild it and have it always available.
  2. Pay toxic debt first If you have debt: start paying as much as you can of those debts with the highest interests (like credit cards and personal loans).
  3. Be charitable: You can experience the joy of helping others through your preferred charitable organization.
  4. Build an emergency fund: Once you reach goals 1 and 2 above, you can keep saving in future monthly budgets until you reach 3 to 6 of your monthly expenses. Once you reach that point you can safely continue with next one below.
  5. Assign to your long term goals: Make your dreams real. You could pay all your debts like mortgage, saving for a big vacation, be financially free or whatever you want.

Negative result

Then you need to save and make more money. You can consider:

  1. Reduce your expenses (like avoid eating out in restaurants).
  2. Sell objects you do not use frequently or even at all.
  3. Taking a side-gig, a part time job or another income generating activity. Based on the urgency, you can decide for an hourly paying job that will give you immediate rewards. It can be even an online job as a freelance, consultant, or any other variant. The important is to make the result positive as quick as possible.
  4. Find ignored cash and change.
  5. Verify whether tax deductions are available to you.

Step #4: Track and adjust

Every month, check your budget to ensure you track it. This shows your spending patterns and lets you verify you are allocating your resources to reach your goals.

You had already chosen your preferred tool in Requirement #3 Adapt the budget to your preferences. So, you can set weekly or monthly reminders to review your budget in the same tool if it allows it (like a budgeting app). Or on your frequently used agenda; be it your phone, computer, or paper-based.

The weekly or monthly reviews are ideal to check and ensure that you are on track to reach your goals. They are also useful to include in the budget the unexpected events that happened. It could be a job loss, an accident, or any other reason that forced you to spend. In those cases, your emergency fund should help. If the fund did not cover them, that is the moment to adjust your budget.

Every month, you check in Step #3: Deduct expenses from income whether your result is positive. If you spent your emergency fund, start building it again. It will keep you covered for unexpected events.

Remember, in creating a budget, you are in control of your money and not the other way around.

To summarize, the best budget for you requires you to :

  1. Know your WHY
  2. Use the least time needed
  3. Adapt the budget to your preferences

And the steps to create a budget are:

  1. Identify your income
  2. Define your expenses
  3. Deduct expenses from income
  4. Track and adjust

What is the next step?

Take a look at out articles living on a budget and budgeting apps


[1] American Psychological Association, Dealing with financial stress; at (visited July 01, 2021).

[2] Deloitte, Zero-based budgeting; at (visited July 01, 2021).

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