5 Steps to Making a Budget That Works

January is always a time when many people are shocked into reality when it comes to their finances, right after the holiday season of overspending and personal indulgence. It’s the moment when we say to ourselves, “Okay, we need to do something about this.”

And when you look at the average household income versus their debt, it’s almost staggering. We certainly aren’t alone. We all have so many expenses, and unfortunately we live in a spend, spend, spend society.  Most folks have a mortgage, car loans, student loans, credit card debt, bank loans, as well as other debts. And sadly, many people use credit cards for the bare necessities in part due to the ever rising cost of living.


You may have thought about starting a budget but maybe don’t know where to start, or maybe you don’t really understand how a budget really works, or maybe you even have some misconceptions about budgeting, maybe thinking it’s like financial handcuffs in which it’s too restrictive and you can’t do anything.

The truth is, budgeting is good for everyone especially when you consider that many households that carry credit card debt have an average balance of $15,654, and the average household pays $904 in interest annually. Isn’t that crazy?

Here’s the good news, it’s never too late to start a budget, and these five steps will help you get a budget you can work with and stick to as well. Creating a good budget will cause you to be mindful of your income and your spending. Doing this will help you reach your financial goals whether they be to retire early, pay off debt, or other goals. Who wouldn’t want that?


Step 1 – Determine Your Expenses

First things first, you need to find out exactly how much money you’re spending each month. You will do this by going over your bank statements and receipts. The most accurate calculations are done by going over everything for a 6 to 12 month period. Since some expenses vary, it’s best to take calculations over this time frame to get a more accurate figure. The importance of this is so that you can truly create a realistic budget.

This step can take a bit of time as you go over all the details. You need to figure out exactly where your money goes and be prepared because I can almost guarantee that you will be shocked. My good friends did this a few months back and were completely astonished to see that they spent a whopping $700 in dining out in just one month! My friend admitted that they never gave a second thought to the spending because it was a coffee here and there on the way to work, then some mornings it was a coffee and a bagel, then buying lunch on days she didn’t pack one, a night out here and there with friends, and suddenly it all added up to a shocking $700. They knew immediately they had to get their spending under control.

When my husband and I went over our bank statements, we were shocked to see that what we “thought” we were spending on groceries each month was nowhere near what we actually spent. I would often stop at the grocery store every few days to grab odds and ends that I knew we were out of… suddenly the $15 trip here, the $25 trip a few days later, and so on, resulted in us spending hundreds more than we realized. It’s that easy to do when you aren’t tracking what you are spending.

When creating a budget, your expenses might include these categories:

  • Mortgage/Rent
  • Food
  • Car & Insurance
  • Cable/Online Entertainment
  • Cell phone
  • Internet
  • Clothing
  • Entertainment
  • Health Insurance
  • Savings
  • Taxes
  • Child/childcare expenses
  • Gifts
  • Miscellaneous


I love specifics so I like to break down my expenses in great detail. I like to know just what I’m spending and where, so I tend to break down things in as many categories as my money goes. You can do your breakdown however you wish. So you can lump some things together, or break them down further if you wish. It’s up to you. Grab my FREE printable Goal and Budgeting Sheets here.


Related post:  Quick Guide to the Cash Envelope System


Step 2:  Calculate your income

Now that you’ve figured out your expenses it’s time to calculate the money that you bring in every month. Your income can include such things as your regular salary from your job, plus any extra funds that occur throughout the year, and also any other sources of income like child support, alimony, rental income, etc. You could even include any work bonuses you get, but be careful if including these because you want to make sure it’s definitely something you’re getting before putting it in your budget.


Something to keep in mind is that depending on how often you get paid, it can cause your income to fluctuate. For instance, if you get paid bi-weekly, there are 2 months of the year where you get 3 pays per month. (Same goes for expenses so if you have a car payment that you pay bi-weekly, remember that you will actually pay that amount three times in one month on two occasions throughout the year.) So be sure you calculate that into your equations.


Another important aspect of creating a budget is that even if one person handles the finances, everyone in the family needs to be involved. While some people don’t like to involve kids in the family’s financial situation, I’m a firm believer that kids should be involved. Telling the kids they can’t have or do something with no explanation doesn’t do anything but create a mystery. Telling the kids that the family has an income and expenses and only so much budgeted for entertainment helps them understand “life”, and that money has to be managed. I think it’s a valuable lesson and bringing up kids to understand this lesson is really invaluable.


Step 3 – Determine and set your goals

This is the step where you determine if you have a deficit or a surplus. Take your total income, and subtract your expenses. If you have money left over, that’s awesome, because it not only shows you are at least living within your means, but you can set that surplus aside for other things like your savings account and to pay off debt.

If you’re on the flip side and are showing a negative balance after subtracting your expenses from your income, then you’ve got some work to do. You are spending more than you make, but don’t worry, many many people are in this category and it’s easy to fall into this trap. Like I said earlier, we live in a materialistic world where we are inundated with messages to buy more, have more, get more, and so on. It’s easy to fall into this thinking.

The important thing to do next is to cut your expenses and unnecessary spending where you can. In our house, the first thing we trimmed was dining out which included morning trips to the local coffee shop each morning for a cup of java and a breakfast wrap which cost us roughly $200 a month.. yes it’s true. It was roughly $4.85 for a coffee/tea and wrap (each) for a near total of $10/day x 20 work days a month. It was insane. The next thing we trimmed was our grocery bill. See how we save hundreds of dollars on groceries here.

If you can’t cut your expenses look for ways you can do things cheaper. If you don’t think you can cut your dining out account, maybe opt for having friends at your house or cutting back on the frequency of going out. You can also look at possible ways to make some extra income to help boost your bottom line as well.

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Step 4 – Track your spending and your progress

This step involves keeping track of what you’re spending so you can ensure you stay on track with your budget. I found it helpful to keep a note on my phone where I wrote in the amount of whatever I spent money on. If I went to the grocery store and got some items for the night’s supper, I wrote it down. If I had to stop at the drug store for some toothpaste, I recorded that too.

Keeping track of your spending this way will help you be more mindful of your money and with any luck you will really think before making any spontaneous purchases. It helps to keep you accountable as well.

Set reasonable goals for yourself that are attainable. Rather than saying, “I will pay off $25,000 of debt this year”, you may be setting yourself up for failure as that’s a pretty big goal for the average person. Rather, try to start small and maybe say “This month I will pay an extra $100 on my debt (or whatever amount is doable for you).” Think of your goals in terms of bite size pieces that can be achieved. Achieving several small goals leads to encouragement and increases the likelihood you will want to keep moving in the right direction.


Step 5 – Be reasonable

Don’t forget to reward yourself every now and then. If you’re used to freewheeling spending, it can be hard to reign in the purse strings and be strict with a budget so make sure you reward yourself when you reach certain goals or achievements. That doesn’t mean you go on a shopping spree, but rather a small reward that still feels like a treat. The objective of a reward isn’t to put you farther behind, or blow the budget you worked hard to set up.



Having a budget is one of the things in life that takes some work, but the benefits far outweigh any inconvenience.

Are you working on your own budget? What helps you?

Ciao for now…

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