There are a few simple steps you need to take in order to achieve your financial goals. Whether these goals start with paying off debt, increasing your savings rate, or generating wealth for financial independence, the beginning steps to achieve them remain the same.
The first step is a financial clean house. This is achieved by tracking your finances. As soon as you’ve done this, it’s time to create a budget.
To dive into paying off debt first, visit How To: Pay Off Debt – Like a Boss.
To dive into increasing your savings rate, visit How to Calculate Your Savings Rate – And Why You Need To.
Be sure to join the Stepping Stones to FI weekly newsletter and access the FREE Resource Library to download an easy to fill out budget worksheet to help you work through all the steps in this post!
Your household budget is like your blueprint for happy and healthy finances. That blueprint provides financial guidance, direction and planning. You’re simply not going to make much progress without it.
If you don’t have a budget yet, you aren’t alone! The steps to creating your budget can be confusing, overwhelming, and overall pretty unpleasant. There’s a reason why only around ⅓ of Americans have and use a budget. But I’m here to tell you that it just doesn’t have to be that bad!
First, let’s review a few of the reasons why you need to create a personal or household financial budget. Once you understand the value of having one, it is easier to stick with it.
Second, let’s remove the confusion by going over the steps to create your budget. These are simple and actionable steps that you can take today.
Lastly, I’ll provide some tips to monitor your budget and adjust it over time. This keeps you motivated to continue making progress and reaching your financial goals.
Once you start reaching financial goals with the help of your budget, you’ll never want to go along without it. And that’s a budget you can stick to!
So let’s get started. Here’s your complete beginner’s guide to finally creating a financial budget you can stick to.
Why you need to create a budget
Reason #1: To understand your spending across every category
The process of breaking down your expenses and spending by category is very enlightening. There may be areas that you don’t even think about each month, meaning that whatever you spend in this category is instantly dismissed and forgotten about. This can make mentally tracking your finances pretty confusing over the month and lead to bounced checks, overdraft fees, unpaid bills and other financial issues.
Reason #2: To understand your spending habits
Your spending categories tell a very clear story of where your money is going throughout the month. Knowledge is power. Any frivolous spending will be forced into the open, allowing you to do something about it.
Reason #3: Track and monitor your spending
This is so important when it comes to making progress. As I’ve said many times before:
If you don’t know where you started or where you are going, you have no clear path to follow.
Reason #4: Stay on track
Remember, there is a very good reason to go through the often painful process of tracking finances and establishing your budget. It will allow you to set new goals and actually stay on track to achieve them!
Reason #5: Save more money and pay off debt
As you refine your budget, you’ll find that it is easier and easier to save more money. With ever increasing money left over at the end of the month, you’ll be able to pay off debt faster and increase your savings rate.
Reason #6: Set the path to FI (Financial Independence)
With an improved savings rate and the newfound ability to control your finances, you’ll be ready to establish a plan for retirement and/or financial independence.
Steps to create your personal/household budget
When it comes to writing out your budget and tracking your spending by category, there are a few options, depending on personal preference.
Step #1: Track your monthly expenses
Now, I know I’ve already said this. I’ll say it again though. The first step is to track your finances for at least a month. In the process of tracking your finances, you’ll break down your spending into categories. You will need these categories to map out your budget.
Go ahead a review this blog post. Then come back to working on your budget. Go ahead, I’ll wait……
Step #2: Pick a budgeting tool to organize your income and spending categories
There are a few tools to choose from and completely depend upon personal preference. I suggest trying out a couple and see what works for you.
Option #1: Your bank
With day-to-day banking needs moving to online and mobile platforms, more and more banks are offering free budgeting and tracking tools for free. This would be the easiest place to start. Check out your bank’s website and see if they offer tracking tools. Play around and see if the software works for you.
- If you find that the software is incomplete, hard to use, hard to access, confusing, or you don’t like the layout, then it probably won’t work well for you.
- And if the layout is user friendly and clear, great! Work your way through the steps of the software and begin the process of tracking your expenses throughout the month and setting up your spending categories.
Option #2: Online software tools
If either your bank doesn’t offer any tools, or you just don’t like the ones they have, check out some of the online options. There are now so many to choose from, both free and paid for.
These programs will:
- Link with your:
- Bank accounts
- Investment accounts
- Credit cards
- Track your spending across all accounts
- Provide categories to label spending
- Allow you to create your own spending categories
- Help you establish a budget
- Monitor spending habits and offer suggestions to make improvements
- Help you set financial goals and track your progress
- Provide helpful alerts to your mobile device
- Offer many more helpful tools, depending on your needs
A few online tools to check out:
|Online Tool||Cost||Ideal For|
|Mint||Free with some added costs||Expense tracking and |
|YNAB (You Need A Budget)||34-day trial then $6.99/month||Hands on budgeting|
|Personal Capital||Free Premium services||Investing / Wealth |
|MoneyStrands||Free||Budgeting without linking |
|Cinch||90-day trial then $4.99/month||In depth financial |
Option #3: Good old spreadsheets
For the old-fashioned, overly analytical or spreadsheet junkie, there is still the good old go-to spreadsheet.
Google even offers an easy financial form that is pre-formatted for you. Visit Google Sheets (https://docs.google.com/spreadsheets) and under templates you’ll find a monthly budget sheet and an annual budget sheet. The form will prompt you to enter the pertinent values and then it will run the calculations for you and provide plenty of graphs and charts to keep your visual side informed.
Since I started tracking my finances before many of these online tools existed (yes, I am that old), I started out by creating my own spreadsheets. I’m also a bit of a control freak when it comes to my categories and calculations, so I like the ability to fully customize my forms for my specific needs.
Option #4: Create your own personalized mobile app
If you are looking for absolute flexibility and ease of use, this is worth trying out. I’ve used all the above methods and finally settled on using my own Google Forms app.
The benefit here is that you create your own categories, load it onto your smartphone and it’s there anytime you spend money.
When you add an expense, the form records the details you want to track, then adds them to a Google Sheets spreadsheet. There you can easily highlight any aspect of your budget you need to inspect, view pie charts to quickly see how you’re doing across spending categories and pretty much anything you need.
It probably sounds complicated, but it took me about 20 minutes to set up. You can learn the detailed steps by visiting:
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Step #3: Review spending areas
Once you have tracked your spending and placed expenses into their appropriate categories, you can total up what you spent in each area.
With these totals you can create a pie chart to see how much you spend as a percent of your total expenses for each category. This is a great visual to see where the majority of your spending is going and map out areas that need adjusting.
Step #4: Set a spending limit for each category
Once you review the spending area, check for any surprises. Are you spending way more on eating out than you realized?
Take some time and review areas of overspending. Set a limit for each category and try to stay within budget. This is much more effective than simply trying to save an extra $100 over the month. Instead, find out exactly where that $100 will come from. It could be by saving $60 on eating out and then $20 on transportation by not driving so much and then $20 from your clothing budget.
Step #5: Track for the next month
Monitor your spending over the next month and see if you are able to stay within budget across all spending categories. Don’t worry about making adjustments yet.
Step #6: Review how it went
Once the month is fully tracked, review how it went. Did you feel deprived? Did you overspend unexpectedly? Were you able to stay within budget or even below budget?
Step #7: Continue to adjust
Set new spending limits for the next month and continue to adjust as needed.
Step #8: Establish a savings plan with money left over
Over time you will gain a clear understanding of where you money is going and where you are overspending. Continue to cut back as possible.
Then for the fun part. It’s time to decide what to do with all the money you have left over!
Start with debt payoff, then emergency savings, then investment savings. You can read more about this at 5 Simple Steps to Financial Independence.
Creating a personal or family budget is so important because it arms you with an understanding of your spending habits. Once you understand your spending habits, you can highlight areas for improvement and give your money a purpose. Whether you are wishing to save more money or payoff debt, progress starts when you have a clear plan and budget in place.
There are some great tools you can use to make budgeting work for you. It doesn’t have to be tedious, overwhelming or confusing! Whether you’re old fashioned and prefer pen and paper (something I still often do!) or want the most in-depth and personalized software, there’s a budgeting system that’s perfect for your needs.
It’s time to stop putting it off. Get started today because your financial goals will thank you later.
- Pick one of the above tools to track your spending.
- Track your spending for 3 months. You can do this by going back three months or take it slow and start tracking over the next three months.
- Review your spending across all your categories. Highlight areas that can use improving. For a great example of what I learned from my tracking experience, visit I Tracked My Spending for One Month, This is What I Learned.
- Using your spending categories, create your first budget. Set reasonable limits to how much you want to spend within every category and leave room for saving and paying down debt.
- Give that budget a shot for the next month. After every month, review your budget and make adjustments as needed.
- Remember, no budget is set in stone. You will always make adjustments as life changes and your financial goals evolve.
- Don’t forget to visit my FREE Resource Library to download your Budget Workbook and Worksheet today! You will also find many other helpful printables, like the Monthly Expense Tracking Worksheets. See below to learn how to gain access.
- Don’t forget to let me know how it goes in the comments!
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