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How To Budget: Create A Household Budget in 4 Simple Steps

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It may be tempting to go around treating yourself every day without ever thinking about how much money is in your bank account.

But let’s face it — you don’t want to be struggling paycheck-to-paycheck, swimming in debt with nothing saved for emergencies. So unless you’ve got a money fountain in your backyard (or a generous trust fund), you need a plan for how you spend your hard-earned cash.

Creating a budget — and sticking to it — could give you the financial freedom you crave. And it doesn’t have to be a grueling process.

How to Budget in 4 Easy Steps

  1. Know Your Net Income and Average Expenses
  2. Set Your Financial Goals
  3. Find Your Favorite Budgeting Method
  4. Find the Best Budgeting Tools for You

Gain control of your personal finances by learning how to budget in a way that makes the most sense for your lifestyle. We’ve laid out exactly what you need to do to create your own model budget in four pretty simple steps.

Step 1: Know Your Net Income and Average Expenses

Before you can make your budget work effectively, you need to know your numbers. We typically like to focus on a monthly budget, since most bills are due once a month.

Get started by logging into your checking account online and grabbing your last couple months’ worth of bank statements. While you’re at it, grab your credit card statements, too.

How to Figure Your Monthly Income

First, write down your monthly income.

This should be your take-home pay for the month — your monthly after tax income. That’s the money you earn (your gross income) minus deductions for taxes, Medicare, Social Security, health insurance contributions and allocations to retirement accounts like your 401(k).

This part is easy if you have a full-time, salaried job. If you are paid by commission, work hourly or have irregular income (like freelancing), use an average of the last six months to get a rough idea. Self-employed budgeters can benefit by taking a step back each quarter to examine their income.

“When you’re self-employed or have significant freelance income, you’re typically required to make quarterly estimated tax payments,”said Robin Hartill, a Certified Financial Planner and senior editor and writer for The Penny Hoarder. “Having to check in four times a year can be great for your budget.”

Hartill said you can also make more frequent estimated tax payments if that helps you budget your self-employment income better.

“Making payments weekly or biweekly instead of four times a year can make budgeting for taxes a lot more manageable,” she noted.

But don’t just stop there when calculating your monthly income. Add any extra money that comes in from your side hustles, child support payments, recurring bonuses or stipends, financial aid payments — include it all.

How to Figure Your Monthly Expenses

Your next step is the painful part: It’s time to log your monthly expenses to see how much you spend.

Start with your regular fixed expenses, which may include:

  • rent or mortgage payment
  • utilities
  • car payment
  • car insurance
  • life insurance premiums
  • credit card payments
  • student loans payments
  • other debt repayment
  • cell phone bill
  • internet
  • cable TV
  • other monthly subscriptions, like Netflix or Spotify.

Don’t forget to include non-monthly but recurring expenses, such as:

  • vehicle registration fees
  • credit card fees
  • HOA fees
  • professional association dues
  • annual subscription renewals

To incorporate these non-monthly but regular expenses into your monthly budget, add up the total cost for a year, then divide that number by 12 to find out how much they cost each month.

You can save up for these annual expenses by setting up sinking funds so that you’re prepared to pay the full cost when the bill comes due. You may even want to open a separate bank account for those expenses so you’re not tempted to spend the money.

From here, start adding up your variable expenses. Analyze your spending habits. How much are you spending on necessities and unexpected expenses that aren’t fixed, such as groceries, clothing, and medical bills? What about the amount of money you drop on nonessential expenses like eating out and drinks with friends?

To get a full picture, organize your spending into budget categories. For example, movies, concerts and museum visits can all go under entertainment. Your gym membership, yoga membership and the drop-in rate on a CrossFit class can all go under fitness.

Look at a few months of statements to get an average for this part, too. That will give you a more accurate picture of your finances.

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Step 2: Set Your Financial Goals

If you’re going to succeed at this budgeting game, you need to have an idea of what you’re hoping to accomplish. When you create a personal budget, it ought to align with your goals.

It can be a simple short-term savings goal like building a modest emergency fund or funding a vacation with your college besties. Or it can be a long-term one, like learning to budget so you can pay off your mortgage early or sending your kid to college without student loans. And don’t forget about funding your retirement — no matter how far you are from that milestone.

Set a goal, and make it a motivating one — your financial plan could be the only thing that stops you from using your credit cards to indulge in mindless retail therapy.

Next, get your priorities in order — literally. Write them down in order from most to least important to get an idea of where you want your money to go.

You might not get your priorities right the first time, and that’s okay. It’s challenging to choose one option over another, and if the first list doesn’t work well, you can always rework it. Do some adjusting to strike a balance between “fun” and “responsible” spending.

You can take things a step further by mixing financial goals with personal ones. For example, vowing to cook more at home will help you spend less on restaurant meals and stick to healthier food choices Planning for meals and preparing a shopping list can help you save money at the grocery store.

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Step 3: Find Your Favorite Budgeting Method

Once you have a complete picture of your finances, it’s time to pick the budgeting plan that works best for you. There are many different budgeting methods to choose from.

Spreadsheet Budget

Log your income and track your spending using a Microsoft Excel spreadsheet or a Google Sheets spreadsheet. Create bar graphs, line graphs and pie charts for data visualization.

Zero-Based Budgeting

A zero-based budget is a budget plan where you allocate where every dollar of your income is going each month. When you take your income and subtract all your planned spending, savings allocations and debt payments, you should end up with zero.

Cash Envelope System

Followers of the cash envelope system fill envelopes with money to coincide with their spending limits for all of their variable expenses, like groceries or entertainment. Once the envelopes are empty, you have to pause your spending until the end of the month or whenever it’s time to refill your envelopes.

50/30/20 Method

With the 50/30/20 budget plan, you spend 50% of your income on essential expenses, 30% on fun and 20% on financial goals like saving, investing or paying off debt. You don’t have to drill down on exactly how much to spend on transportation or take out — as long as you stay within the appropriate percentages.

Bare-Bones Budget

A bare-bones budget takes into account only your most essential needs. It’s fitting for those with low income or people who are trying to eliminate the fat from their budget so they can stack up cash for an emergency fund, other savings or paying down debt.

Bullet Journal Budget

Use a bullet journal budget to creatively track where your money’s going. A journal gives you the ability to customize your budget how you see fit and make it attractive so that you actually don’t mind sitting down to manage your money.


Kakeibo is a long-standing Japanese budgeting method that incorporates mindfulness into a basic household ledger. You track your spending by using four simple budget categories — needs, wants, culture and unexpected/extra expenses.

Calendar Budget

With the calendar budget method you use an actual calendar to write down when you get paid, when your bills are due and when you spend money. Jot down your remaining balance at the end of each day.

Half-Payment Method

The half-payment method helps take some of the stress away from paying recurring bills each month. You budget for half of your regular household bills a month early so this way you don’t face as big a financial burden when the bills actually come due.

Paycheck Budget

The paycheck budget ignores the typical rules of creating a budget to cover your expenses for a month. Instead you budget for each time you get paid — whether that’s weekly, biweekly or semi-monthly.

Even after you’ve picked your favorite budgeting method, don’t be afraid to bend it a little to fit your financial situation. You might choose to incorporate different aspects of various budgeting methods into your personal budget. For inspiration, learn how Kumiko Love, of The Budget Mom, combined three budgeting styles to form her budget-by-paycheck method.

Step 4: Find the Best Budgeting Tools for You

You’re not alone in this quest to budget your money. There are tools and actions that can help.

Automate Your Budget

Automating the budgeting process helps you focus on your priorities by sending the money where it needs to go before you have the chance to blow it on an impulse.

On the income side, that can mean setting up the automatic deposit for your paycheck to be divided between your checking and savings account.

In the expenses column, you can set up autopay for monthly expenses like your car payments, student loans or credit card bills, helping you avoid those dreaded late fees. And if your bill due dates don’t jibe with your cash-flow situation, you can call a lender or company and ask them to adjust the date.

To grow your emergency fund, you can have a portion of your direct deposit go into a savings account each time you get paid.

Budgeting Apps

While budgeting by hand works great, your smartphone can streamline it. A budgeting app takes some of the work out of money management and serves as a real-time tool for tracking spending.

The Penny Hoarder’s 2021 budgeting survey found that 14% of those who budget use an app. Mint was the most popular, followed by EveryDollar, Mvelopes, You Need a Budget (YNAB) and Personal Capital.

Many apps sync to your checking account, automatically categorize your spending and tell you at a glance how much you can responsibly spend before your next payday. Some will even make a budget for you based on your past spending habits.

Other apps require you to manually enter your spending. That process can provide you with insights about your spending habits and highlight ways to save money without you having to analyze months of bank statements.

This list of our favorite budgeting apps will help you choose one you love. If you’re managing household finances with a partner, here’s our recommendations for the best budgeting apps for couples.

Although some apps charge monthly or annual fees, you can get started with a free trial to see if it’s worth the money.

Don’t Let Setbacks Discourage You

If your first attempt to create a budget is a flop, don’t feel bad.

It’s natural to forget about some expenses or set spending limits that are too strict the first time around. Just keep at it and make adjustments as necessary.

You’re likely to fall off your budget in one of two ways: You set unrealistic restrictions for yourself and fail to meet them, or you forget to keep up your budget and give up.

Make sure to include some fun money spending in your budget so your money plan doesn’t feel so restrictive. You may need to recruit an accountability partner — a friend you can share your money goals with and who’ll remind you to stay consistent and take action when you falter.

You can connect with like-minded people and glean some budgeting tips from members of The Penny Hoarder Community.

Remember, making a budget is not a one-time event. Keep an eye on your plan as your goals and life change. Earning more income, losing a job, getting married, having kids, starting a business — each of these life changes requires you to review and recalibrate your budget to stay on track to meet your goals and live your life.

Frequently Asked Questions (FAQs) About How to Start a Budget

There are lots of questions from beginners about how to set up a budget. We’ve rounded up the answers to the most commonly asked ones for help you decide which type of budget is right for you.

How Should a Beginner Budget?

Beginners should lean into tools that will keep their spending within the parameters they set.

For example, you can download a budgeting app to keep tabs on your available funds without having to do any math. Many budgeting apps will alert you when you’ve gone over budget — or are getting close.

Another option that’s great for beginners is the cash envelope method. Using physical cash and having a limited amount to spend makes sticking to your budget more tangible.

What is the 70/20/10 Budget Plan?

The 70/20/10 budget is another percentage-based budgeting method, similar to the 50/30/20 budget. Following this plan, you divide your take-home pay into three buckets: 70% is for all your monthly spending, 20% goes to savings and 10% is for debt or donating.

This method allows you to carve out funds to prepare for future expenses, pay down debt and benefit others in your community or beyond. The 70% that’s for monthly spending must cover everything else — bills, groceries, your gym membership and outings with friends.

Because there’s no further breakdown of how you spend that 70% chunk of your income, you’ve got to be disciplined enough to ensure that your discretionary spending doesn’t eat into the money you need to pay for necessities. If you lack that discipline, try automating your bill payments so they’re taken out of your account when you first get paid.

How Do I Stop Living Paycheck to Paycheck?

To break the payday-to-payday cycle, you’ve got to either earn more income or make adjustments by cutting down on your expenses.

If you focus on income, you could take on a side gig, ask for a raise or find a new job that pays better than your current one. If you get a nice windfall — like a bonus or a big tax refund — hold onto that cash so you can build up a savings buffer and stop living paycheck to paycheck.

If you focus on cutting expenses, zero in on your major recurring costs to make a big impact on how much you spend. Fixed expenses don’t have to be permanent. Can you take on a roommate to cut your living expenses in half? Are you willing to downgrade to a less expensive car to reduce your auto payments?If you tend to overspend on variable expenses — such as eating out or household items — start paying yourself first by automatically putting a percentage of your take-home pay into savings so you aren’t tempted to spend it.

How Much Money Should I Save Each Month?

Many financial experts advise saving 20% of your net income. While that’s a good savings goal, how much you should save depends greatly on your individual situation.

If you don’t make much money or you have a lot of essential expenses, you might want to start with saving 5% or 10% of your income. You can work your way up to saving 20% as your income grows.

Of course, if you’re able to save more than 20% of your income, that’s wonderful. You’ll be able to reach your financial goals faster. Just make sure to prioritize having an emergency fund and contributing to retirement before focusing on other goals, like going on a dream vacation or saving up for a down payment on a new car.

Other Budgeting Resources

Budgeting For Beginners

Budgeting Methods

Budgeting Tips

Key Takeaways

  • To get a clear picture of your spending, analyze several months’ worth of expenses.
  • Setting a financial goal is one of the most important steps to succeeding at budgeting your money.
  • There are countless budgeting methods out there. When you find one that works for you, feel free to bend the rules to fit your situation.
  • Use a smartphone app to streamline your budgeting process.

Nicole Dow is a former senior writer at The Penny Hoarder. Contributor Whitney Hansen updated this post.