No matter how much income you earn, it’s essential to have a plan for your money. Otherwise, there’s a good chance you’ll find yourself overspending, struggling with debt, or failing to reach important financial goals in your life.

Keep in mind that budgets aren’t about restrictions or forcing yourself to do without. Instead, a budget helps you organize your finances so you can accomplish the objectives that matter most to you.

Yet even though budgets are important, creating one can sometimes feel intimidating — especially if you’ve never followed a financial plan before or if you’ve been unsuccessful at budgeting in the past. The good news is that the budgeting process doesn’t have to be complicated. There are multiple ways to budget, and you can choose a method that fits your lifestyle.

What is a budget?

A budget is a written plan that you use to map out how you want to spend the money you earn each month. It’s an outline of your anticipated income, expenses, and savings goals.

Managing your money with a budget helps ensure you’re putting your earned income to good use based on your personal goals and values. Without a budget, it’s easy to run out of money before your next paycheck arrives, struggle with debt, develop bad credit, and face other negative consequences.

How to make a budget step-by-step

Once you’re ready to create a budget of your own, the following steps can help you get started.

1. Establish your goals

Before you create your budget, it’s helpful to outline the reasons why you want to go through the effort of managing your money better. Budgets don’t have to be complicated, but they do require work.

Sometimes, budgets also mean you have to say “no” (or at least, “not now”) to certain purchases in order to afford the things that matter most to you. Therefore, it’s wise to define your financial goals at the beginning of this process so you’ll have a clear picture of what you’re working toward.

Consider making a list of both short- and long-term financial goals. Long-term goals, such as funding retirement or a child’s education, matter, but they could take decades to reach.

Short-term goals, such as building an emergency fund, paying down debt, or even saving money for a vacation or event, could help you stay motivated in the meantime. You might find it easier to cut back on spending, for example, if you’re trying to find ways to save money for an upcoming concert (along with other financial goals).

Read more: How to save money in 2024: 44 tips to grow your wealth

2. Calculate your income

Understanding your net income is a critical step in building an effective budget. Net income is your take-home pay — the amount of money you bring home after taxes and any other payroll deductions (such as health insurance premiums or contributions to employer-sponsored retirement plans).

You’ll need to know your net income figure to understand the amount of money you have available to spend and save each month.

3. Choose a type of budget

Before you build a financial plan of your own, it’s helpful to know that there are many different budgeting methods available. You can review the different types of budgets to decide which option seems best for you. Don’t be afraid to try multiple budgets until you find the right fit.

Below are some of the most popular types of budgets:

• 50/30/20: The 50/30/20 rule is a budget strategy you might want to consider if you’re a fan of simplicity. This approach encourages you to spend around 50% of your income on needs, 30% on wants, and 20% on savings and debt repayment.

• Zero-based budget: A zero-based budget is a money-management strategy that gives every dollar you earn a job, such as paying bills, paying down debt, or saving toward your emergency fund.

• Envelope budgeting: The envelope budgeting system is an old-fashioned way of budgeting that uses physical cash to control your spending each month. You separate the available cash you have to spend into different labeled envelopes (e.g., gas, groceries, dining out, etc.) and withdraw money from the appropriate envelope when you need to make a purchase. Digital versions of envelope budgeting are also available if you like the concept but prefer to use an app.

• Spreadsheet budget: If you have privacy concerns or you want to create a highly customized budget, an Excel or Numbers spreadsheet budget might work well for you.

4. Include monthly expenses

The next step in building a budget is to have a clear picture of your monthly expenses. Before you can decide how you want to use your money moving forward, it helps to understand how you’ve been spending it.

Reviewing credit card and bank statements can give you a good idea of where you’ve been spending your money in the recent past. If you’re someone who spends a lot of cash, you may also want to start tracking those purchases as well.

Below are some common monthly expenses you may need to include in your budget.

• Bills: Rent or mortgage, utilities (electricity, gas, water, etc.), insurance, childcare, etc.

• Debt: Payments on car loans, personal loans, student loans, credit cards, and other lines of credit.

• Essential needs: Groceries, gas, personal care items, healthcare, insurance, automotive maintenance, etc.

• Discretionary spending: Dining out, entertainment, streaming services, hobbies, travel, birthday and holiday spending, nonessential shopping, gym memberships, etc.

• Savings: Emergency fund, retirement, education fund, etc.

Understanding fixed vs. variable expenses

As you create a budget, it’s helpful to understand the difference between fixed and variable expenses. Planning ahead for these costs requires two different approaches.

• Fixed expenses: In most cases, the cost of fixed expenses remain the same from month to month (or year to year). Bills such as car payments, rent, and insurance premiums are examples of fixed expenses.

• Variable expenses: The cost of variable expenses may fluctuate each month, quarter, or year. Groceries, gas, and electricity bills are all examples of variable expenses.

When you’re looking for ways to save money, it’s typically easier to make changes to the variable expenses in your budget.

Read more: 7 ways to save money on a tight budget

5. Review and make adjustments

Once you make a plan for your monthly expenses, it’s time to take your budget for a trial run. There’s a good chance your budget may need some fine-tuning in the months to come, especially if your cash flow is negative (your expenses exceed your income).

As a result, you’ll want to track your spending and review your budget on a regular basis. You may need to update your plan if you find that you’re spending too much in certain areas or that you haven’t set aside enough money in other budget categories. Adjustments are a normal part of the budgeting process.

Tips for sticking to a budget

Creating a budget is a good starting point. Yet even if you have the best of intentions, sticking to a financial plan can be a challenge. Below are some tips to help you stay true to the money goals you set for yourself in the days, weeks, and months to come.

• Use an app or software. There are many digital budgeting tools and money-saving apps available that simplify the process of tracking your expenses and spending. If you’re looking for a tool to help you accomplish important financial goals, it’s helpful to know which type of budget you want to use and look for apps that offer features that match your preferences.

• Reduce spending. Finding ways to reduce spending can be helpful when you’re trying to stick to a budget. As you free up more cash, it should become easier to accomplish your financial goals and to avoid the stress that comes with overspending.

• Consult a professional. If you’re having trouble setting up a household budget on your own, consider seeking outside guidance from a trusted financial professional. A reputable financial coach, accredited credit counselor, or an adviser from your credit union or local bank may be able to help create a budget and provide tips on how to stick with one.

The importance of creating and following a budget

There are many reasons to follow a budget. Below are a few of the top benefits you could enjoy when you create a plan for managing your money.

• Correct poor spending habits. It’s easy to overspend when you’re not managing your money. But when you use a budget, you decide ahead of time how you want to allocate the income you earn. Once you outline your financial goals, it should become easier to say “no” to unplanned expenses so you can reach your objectives.

• Pay down and avoid new debt. When you map out how you intend to spend your money each month, it’s easier to avoid going into debt — especially credit card debt that results from overspending. Depending on your financial situation, you might also be able to include debt-elimination strategies in your budget. Doing so could help you save money over the long run by reducing the money you pay in interest charges.

• Reduce financial stress. Another important benefit of following a budget: A solid financial plan could help reduce your financial stress and improve your mental health.

Bottom line on budgeting

A budget can be a powerful tool to help you establish and reach your financial goals. Whether you’ve never used a budget in the past or you’ve had trouble sticking to one, these tips could help you create a basic money management plan that works for your lifestyle.

Keep in mind that there’s no such thing as a perfect budgeting method for every situation. So, you shouldn’t be afraid to try out multiple budgeting strategies and to make adjustments to your financial plan until you find a solution that works for you.

Budgets take time to perfect, and trial and error is a good thing where budgets are concerned. Don’t feel discouraged if you need to make changes along the way. Often, a changing budget means that you’re paying close attention to your money and working toward your ideal financial plan.