How to Create a Budget [New Step-by-Step Guide]

the millennial money woman blog post "how to create a budget"

Disclosure: This post may receive compensation from partners listed through affiliate partnerships, at no cost to you. This doesn’t influence our ratings, and the opinions are our own. Learn more here.

Creating a Budget

Key Takeaways

  • Assign a purpose for each dollar
  • Following a budget is always harder than creating a budget
  • Sticking to a budget is a successful habit used by the wealthy
  • Remember to be flexible with your budget because life happens
  • If you want to achieve your financial goals – it’s time to start a budget
budget template background 2

Free Budgeting Templates

Sign up below to receive my free budgeting templates and my latest content updates.

That “B” word can give some people chills… I know it certainly did for me, when I was trying to get my financial life in order. 

In fact, I was so nervous about the “B-word” that I tried to put it off for MONTHS! 

But that was just the thing: I realized I was so afraid of actually peeling back the layers of the onion and peering into my overall spending (and earning) habits, that I started losing sleep at night.

That’s when I called a family meeting with my husband. 

We sat down together (over some red wine) and reviewed the last 3 months of our spending habits. 

Although I was bracing for a gripping reality check (I literally had a stress reliever ball sitting next to me), we were surprised to see our general spending was in line with what we had imagined!

…And then our spirits sank…because we realized we were spending over $500 going out to eat at restaurants per month.

At this time, the stress reliever ball was in heavy use (alternating between my husband and myself). 

How could we be spending $500 per month on just restaurants? 

Talk about a serious and bracing reality check. 

After 2 (or 3) glasses of wine and calming down our heart rates, my husband and I developed a plan: We decided we’d cut our spending for eating out by 60%. 

We weren’t going to go completely from hero to zero. 

But we were going to take some healthy steps to stop the excess spending (and start investing what we would be saving from decreasing our restaurant bill!). 

And suddenly, we were seeing our investment account balances increase over the next few months – and even better: We were sleeping peacefully at night. 

No more stressing over how much we were spending, because we took that bold first step, figured out how much we were spending (and on what), and developed an action plan to redirect our dollars.

And yes, that was all thanks to the “B-word” – our budget.

Sneak Peek: My Top 2 Favorite Budgeting Tools

Best Budgeting App for Beginners:

Best Budgeting Platform:

Why do you need a Budget?

Are you staying up at night because you are worried about money?

Do you want to retire at some point in your life but just don’t know how to start?

If you answered yes to any of these questions – the answer is simple: You need a budget. 

What is a Budget? 

The “B-word” is often considered to be an ugly, disgusting word – but in reality, it’s not!

A budget is just another tool in your financial toolkit to help you figure out what you need to do to accomplish your future financial goals.

"The key to creating a budget – that actually works – is to be honest with yourself."

You literally have to track every cent that is spent over a certain period of time. 

That means if you purchase a piece of chewing gum for $0.15 – you need to track that 15 cent expenditure. 

It may sound silly, but you need to be as detailed as possible – only when you create your budget.

the millennial money woman blog post "how to create a budget guide"

How to Create a Budget in 7 Steps 

Creating a budget is not as bad as it sounds.

There are several ways you can create your budget:

  • Use your traditional pen and paper
  • Use an excel spreadsheet (my favorite)
  • Use budgeting apps like Simplifi or Quicken (more on that, later)

And here’s my favorite part: I do my budget over a glass of wine and some soothing background music. 

That ambiance makes the actual budgeting part much less scary and daunting – because budgeting really isn’t scary! 

Budgeting is there to help you benefit and reach your financial goals.

Step #1: Collect your Financial Information

Before you start analyzing, calculating, creating, or implementing – the first step is to gather all financial documents that apply to your financial situation. 

The financial documents that I would look for include:

Documents Needed to Monitor Income Documents Needed to Monitor Expenses
W-2 forms (if applicable)
Credit card (or store card) statements
Latest tax return
Mortgage (or rent) statements
1099’s (if applicable)
Auto loan statements
Pay stubs
Student loan statements (if any)
Investment accounts (Used to monitor the gains / losses)
Utility bills
Bank statements
Other receipts from the past 3 months

Because a budget will require a detailed analysis of how much money you earn and how much money you spend, we will need as much information as possible to accurately see where you are currently in your financial picture – and help you create a step-by-step path to achieve your financial goals.

Step #2: Figure out Where your Money is Coming from

That’s right – we’re 
still not at the stage of figuring out how much money you spend (and how you spend it). 

The second step is pretty fun: We’re figuring out how much money you earn and where that earned income is coming from! 

(Get ready to pour some wine!)

There are a few ways you could be earning income, some of which I’ve listed below:

Type of Income Frequency
Salary (excluding some jobs such as a school teacher)
Stable – weekly, bi-weekly, monthly, etc.
Salary – for jobs such as a school teacher
Stable but with large lump sums at the first quarter and last quarter of the year (no salary during the summer)
Highly variable
Self-employed / freelance
Highly variable
Highly variable
Investment income
Likely variable

As you can see, there are many different ways to earn income – and of course, the income frequency can also vary by the type of income earned. 

How to Determine the Difference Between Variable and Fixed Income

The first thing you want to do is figure out whether you live off of a fixed income or a variable income – or both. 

Even if you are out sick, or you take a 4-day vacation, your income will still be the same. 

A variable income typically is a bit riskier than a fixed income because you simply don’t know if you’ll see a check in your bank account during any given month. 

However, the upside (or your earning potential) of a variable income stream is much, much higher than with a salary.

the millennial money woman blog post "How to Calculate Total Monthly Pay on a Variable Income"

How to Calculate Total Monthly Pay on a Variable Income

Let’s say you make your living off of a variable income – so your paycheck fluctuates every month. 

  • Take an average of last year’s annual income
  • Use your lowest monthly income for your monthly income reference

I would suggest 1 of 2 steps:

  • Assuming you worked in a variable income job the previous year, look at last year’s income tax returns. Divide that gross number by 12 – and that’s your average monthly salary going forward
  • You could also use your lowest income month – and take that lowest monthly income number as a baseline for your budget

Bottom Line: Make sure you have a good understanding of how much money you earn each month – even if it’s just an average.

Step #3: Figure out Where your Money is Spent

The next step is figuring out how (or on what) you are spending your money. 

This is the step where you are the detective of your own story! 

Believe it or not – even though we are in control of how much we spend and on what items we spend our money on – typically we don’t remember (or we actively choose not to remember). 

That’s why we’ll resort back to the financial documents that we gathered in Step 1 – and now we start the analysis part of the budgeting process.

Now we actually start peeling back the layers of the onion, taking that detective magnifying glass and looking for the clues that answer the 2 questions: 

  • How much did we spend?
  • What did we spend our money on?

Some of the most helpful documents that will pinpoint some of the clues for your spending trail are listed below. 

To make your life easier, I’ve also listed typically where you’ll find your spending information (oh yes, you’ll have to look at everything you spend your money on). 

Is it a painful process?

Absolutely (especially when you are in denial over spending $500 per month on restaurant food, like my husband and I!). 

Is it worth the pain?


Your bank accounts will be thankful.

Document Type Where to find your Expenses (99% of the time)
Credit card (or store card) statements
  • Review the full monthly credit card / store card statement
  • Spending information is typically broken down by item purchased starting on page 2 – 3 and on
Mortgage (or rent) statements
  • You’ll likely see your monthly payment information on page 1 (or 2)
  • For a mortgage: Make sure you include the following in your expense break-down: Principal, Interest, Taxes, Insurance (sometimes mortgage statements only list principal and interest owed, but you need to include all 4 categories on your budget)
Auto loan statements
  • Typically listed on page 1 or 2 of the statement
Utility bills
  • Should be page 1 of the statement
Bank statements
  • Expenses (or withdrawals) are generally listed on page 2 or 3 of bank statements
Other receipts from the past 3 months
  • Take a look at the following 2 factors on physical receipts: The type of purchase and the amount of the purchase

Please note how I said that *typically* you’ll find the spending information in the sections that I have noted, above. 

Of course, if you have an oddball account, then your spending information will be listed somewhere else.

Let’s say you exhausted your sleuthing skills. 

There simply is NO trace (for whatever reason) of your past 3 months’ worth of spending history. 

Rest assured – I have a Plan B.

Create an Expense Diary & Track all Monthly Expenses

In the case you really can’t provide an accurate picture of your spending pattern over the past 3 months, it’s time to start tracking your monthly spending for the next 3 months. 

Every. Single. Cent.


Tracking every cent sounds super painful – but honestly, I think tracking your spending actually helps you in the long run for the following reasons:

  • Helps you build an up-to-date budget
  • Makes you aware of how much you’re spending
  • Helps you better understand your spending patterns
  • Helps you identify potential serious spending problems
  • Might incentivize you to reduce spending (because you’re so shocked at how much you’re spending)
  • Provides you with an exact (and honest) overview of your monthly spending patterns 

It’s tedious, but your bank accounts will thank me later.

The next step is determining what type of spending you are doing.

Determine Whether the Expenses are Necessary or Discretionary

Now that you’ve created a spending diary (or used bills and statements from the last 3 months), it’s time to categorize your expenses.

In most cases, fixed expenses (such as rent or a car loan payment) is a necessary expense. 

You need to keep paying those bills in order to function properly. 

However – fun fact – the majority of variable expenses are actually NOT necessary (minus vet bills or doctor bills, for instance). 

Variable expenses are *typically* discretionary, which means that you didn’t need to spend money on those items. But you still did. 

Examples include vacations and birthday gifts. 

Trust me – birthday (and wedding) gifts can add up over the year. 

Be careful. 

The point being (and I’ll discuss this later on, too): Assuming you are struggling to find some money in your budget, chances are you can slash your monthly expenses quite drastically simply by looking at your variable expenses (because they are often discretionary). 

Determine Whether the Expenses are Fixed or Variable

One of the important parts to figuring out your spending habits is determining whether your expenses are 1 of 2 (or both) things:

  • Fixed
  • Variable

In my opinion, these are the best types of expenses because you know exactly how much you’ll owe and when you have to pay for it.

Variable expenses can be a budget-killer because if you don’t properly budget for variable expenses (such as an unexpected vet bill), your annual budget will likely be thrown off track. 

This is where an emergency savings fund will help you stay on your budgeting track.

As a quick reminder, your emergency savings fund should typically consist of anywhere between 3 to 6 months’ worth of your expenses in a high yielding savings account.

If you’re new to saving and are wondering which savings account you should open to allow your cash to grow – make sure you select a high-yield interest savings account like CIT Bank.

CIT Bank offers:

  • Competitive interest rates
  • Does not have monthly fees
  • Easy-access bill pay features

Below is an illustration providing some examples of fixed expenses versus variable expenses.

the millennial money woman blog post "Examples of Fixed vs Variable Expenses"

As you can see from this example, fixed costs are predictable (and they’re typically the boring costs like rent or life insurance). 

Variable costs, on the other hand, are the unpredictable expenses (also much more fun expenses, like vacation or gift purchases).

Step #4: Figure out how much Money is left over after each Month

Now that we’ve determined how much money you spend each month and how much money you make each month – it’s time for the nail biter: How much money (if any) is left over each month?

There are 3 types of outcomes:

Scenario Money Left Over?
You spent less than you earned
Money is left over
You spent exactly what you earned
$0 left over
You spent more than what you earned
Negative balance (the worst!)

We will want to avoid the 3rd option by any means. 

We will also want to avoid the 2nd option if possible. 

The ultimate goal with a budget is this: To have money (and preferably a lot of it) left over at the end of the month.

What if you don’t have any money left over at the end of the month?

Determine if you can slash the variable costs.

Do you remember Step 3 and how we determined whether your expenses were fixed or variable?

This is the part where we want to dig further into the variable costs. 

If you remember, variable costs (fluctuating costs) typically are considered to be discretionary – not necessary – expenses. 

The step in this case will be to determine if you can slash variable expenses. 

Variable expenses could include spending money on:

  • Gifts
  • Vet bills
  • Clothing
  • Vacation
  • Groceries

Of course, vet bills and groceries will be necessary. 

However, clothing, vacations and gifts are arguably not necessary expenses and these expenses could be slashed to help your budget.

What if you don’t have any variable costs to slash?

If you can’t slash more of your variable costs, determine if you can slash any of the fixed costs.

This is typically where it gets a little more complicated. 

If you truly cannot slash any variable costs, it’s time to look at your fixed costs (predictable costs). 

Typically speaking, fixed costs are necessary costs and most fixed costs include:

  • Rent / Mortgage payments
  • Auto loan payments
  • Student loan payments

However, fixed costs could also include discretionary expenses:

  • Magazine subscriptions
  • Gym memberships
  • Membership dues

These fixed costs are not necessary – so this is where I would look to slash any fixed costs to create a better and more flexible budget. 

What if you can’t slash more fixed and variable costs?

In this case, you will need to add more income to your budget.

You could accomplish that in several ways:

  • Find a roommate 
  • Find a better paying job
  • Start working a side hustle

These are some examples that I have resorted to in the past to help boost my monthly income.

Step #5: Think about your Financial Goals

Since a budget is a tool in your financial toolkit to help you reach your financial goals with ease – it’s now time to consider what you actually want to accomplish with your money in the future. 

Below are some common finance goals:

  • Retire early
  • Car purchase
  • Start a business
  • House down payment (typically recommended 20%)

All of these goals have 1 thing in common: They require money – and typically lots of it.

And that’s where you have to start using your budget as a tool to guide you in the right direction to reach your financial goals. 

the millennial money woman blog post "retirement goal questions"

Determine how much Money you want to Save / Invest for Retirement

If your goal is to retire early – or retire at all, for that matter – it’s important to consider several factors first:

  • What age do you plan to retire?
  • Where will you live during retirement?
  • How much money do you want upon retirement?
  • How much money will you need annually during retirement? 
  • Do you plan to do part-time work or consulting while “retired”?

Once you have come up with some answers to these questions, you should have a better idea of how much you need to start saving (and investing) each month to take one step closer to your retirement goal.

What if you haven’t started your investing journey? 

I would suggest by opening an account with M1 Finance. I really like this investing app because it’s user friendly, and the basic version is absolutely free.

"The earlier you start with investing and saving, the faster you’ll reach your retirement goal."

Time is on your side. 

Don’t be discouraged if you are in your 40’s or older. 

Start investing and saving for retirement today – you’ll have to contribute more but you’ll likely also have the income to do so.

Determine the cost of your Lifestyle

Figuring out how much you plan to spend at any point in your life cycle is a very important factor to the budgeting process.

Every person has a different lifestyle in mind:

  • Some want to live in beautiful mansions
  • Others want to move in with their children 
  • While others want to leave the country and start new somewhere else

It just depends on your personality and how you envision living your life at any stage.

Once you have a rough estimate of how much your lifestyle will cost you – it’s time to create a budget that will help guide you toward living that type of lifestyle.

The next step is where it actually gets into the fun part…

Step #6: Assign a Purpose for each Dollar

This step, in my opinion, is really cool – because now you get to figure out how each dollar is going to be spent – and in which category it will be spent. 

Below is a list of categories that I would use in my budget to allocate how much money to spend in each category:

  • Food
  • Utilities
  • Housing
  • Insurance
  • Medical & Healthcare
  • Saving, investing & debt payments
  • Transportation / Vehicle Maintenance

Free Budgeting Templates

Sign up below to receive my free budgeting templates, my latest content updates and 10 financial tips to help you achieve millionaire status.

Clear understanding where your Dollars are going

The reason why I think it’s so important to know exactly where each dollar is going – is because now you can’t make any more excuses!

Let’s say you have allocated $100 to the “eating out category” and you have $20 left. 

It’s a Friday night and your BFF calls you up to go out to the movies and then out to a bar. 

That’s easily $50 to $80 for the night. 

Can you afford that? 

Nope. Not according to your budget.

This is where you have to be the bigger person (and withstand peer pressure) and say “no” so that you keep following your budget – and ultimately keep following your financial goals.

If you say “yes” and overspend by $30 to $60 every time someone asks you to do something – that’s going to add up easily (overspending by $720 per year, $7,200 every 10 years) and will make a severe dent in your financial goals (and budget).

You have to be the bigger person, not succumb to peer pressure, and stick to that budget.

Step #7: Flexibility is Key

Ok, so I just went on a tangent to NOT overspend in any budget category. 

But you know what? 

Sometimes life just happens – and that’s OK.

That’s why my last and final step here is to make sure you know that flexibility is an absolute KEY when it comes to budgeting. 

Sometimes life will force you to overspend in a certain category (and that’s just the way things are – they are never predictable). 

Some of those “life happens” expenses could include:

  • Home repairs
  • Vehicle repairs
  • Unexpected vet bills
  • Unexpected health or medical bills

You get my point. 

Typically, the unexpected bills will be categorized under the variable expense (necessary expense) category. 

So what happens if you overspend in 1 category of your budget?

"If you overspend in 1 category, adjust your budget accordingly."

That’s all there is to it: You simply adjust another category to match your current budget spending.

Here’s an example:

the millennial money woman blog post "adjusted budget example"

As you can see from the image above – you’ll have to adjust your budget spending categories at some point.

In this case, if you have to go into the auto repair shop for unexpected car maintenance (such as replacing a flat tire), you’ll have to adjust your spending plans in another category – such as going grocery shopping or going out to eat for that month.

"In reality, budgeting is like a jigsaw puzzle: You simply push around the pieces to make the best match."

It’s that simple.

Helpful Budgeting Tools

The 2 budgeting tools that I would recommend (to either keep a virtual budgeting diary or to simply keep a close eye on your budget) are the following:


  • Grows with you
  • Provides comprehensive tools
  • Provides unmatched customization
  • Quicken is ad-free, with free phone and chat support at every level
  • Enjoy the best of both worlds, with the power of Mac & PC and the mobility of our companion apps

Quicken is your best bet if you’re detailed orientated and want to go in-depth with your budgeting.


  • Projects future balances
  • delivers an ad-free experience so you can focus on real insights
  • Lets you customize the way you view and manage your finances
  • celebrates day-to-day accomplishments and adjusts when you miss your targets

I personally use Simplifi and think it’s a great app for those who are beginner budgeters and prefer to keep things simple.

What I like about both budgeting applications is that they are great tools visually to help keep your budgeting on track and they are user friendly.

Closing Thoughts

Although budgeting sounds boring and scary at the same time… it’s actually not!

Budgeting is a tool that will help you achieve your financial goals so much faster than if you were blindly trying to stay on top of your finances. 

Budgeting does just that: It opens your eyes to the many possibilities of saving money wherever possible so that you can accomplish your financial goals (be it retire early, invest more, pay off student debt, etc.)

Budgeting really boils down to a simple, 7-step guide that I’ve outlined in this post. 

It’s not rocket science – budgeting is something that I recommend you do while:

  • Drinking wine (or your favorite beverage)
  • Turning on some funky music to make a “light-spirited” ambiance 
  • Being with your partner – if you are in a serious relationship or married – and want to include your partner in the budgeting conversation (which I highly recommend)

The point is, as long as make the budgeting conversation in a fun, light-hearted conversation, chances are it won’t appear to be this “scary” thing that you have to do. 

In fact – it’s something super helpful to guide you toward your financial goals.

Happy Budgeting – your bank accounts will thank me later!

What are some budgeting tips you have implemented in your budgeting journey?

Fiona Smith
Fiona Smith
Fiona Smith is the founder of The Millennial Money Woman. She holds her Master of Science Degree in Personal Financial Planning, has advised decamillionaires for 6 years in the corporate wealth management sector and has co-founded a local non-profit community teaching financial literacy. She is the author of the personal finance book How to Get Rich from Nothing and her work is featured on Forbes and FinCon.

Leave a Comment

Your email address will not be published. Required fields are marked *

Get free access to exclusive finance tips, wealth building strategies, investing guides, and much more 👇

fiona smith the millennial money woman

Want to make more money?

Get free access to Fiona’s latest financial tips, wealth-building strategies, investing guides, millionaire planning, and much more.