How To Budget: A 6-Step Guide to Budgeting Your Money | Stash Learn
How to Budget: A 6-Step Guide for Beginners
By: Tara Blaine • Reviewed by: Heather Comella
Published: Dec 14, 2023 • Updated: Jun 09, 2026
In this article:
- What is a budget?
- Why budgeting is important
- 6 Steps to budgeting your money
- How to budget for beginners
- The best budget is the one you stick to
When you start getting serious about your finances, one of the first things you might realize is that a budget can help you answer a lot of questions, from “Can I afford this?” when you’re about to hit the add-to-cart button to “When can I retire?” when you’re thinking about your long-term plans. For many people, budgeting can seem intimidating or too time-consuming at first. But learning how to budget may be the key to setting yourself up for financial success.
Budgeting doesn’t have to be complicated. This guide will take you through the process, including six steps for learning how to make a budget you can stick to.
What is a budget?
In its simplest form, budgeting is just figuring out how much you make and how much you spend and then using that information to inform your future financial decisions. Your budget allows you to plan how you’ll spend your income and keep track of money coming in and out. Tracking your spending lets you see your true financial picture in real-time so you can make informed choices. And planning ahead gives you a chance to put money toward your longer-term goals, like paying off credit cards, saving for a downpayment on a house, or planning for retirement.
Why budgeting is important
Why learn how to make a budget? The short answer is that knowledge is power. It can be difficult to exercise control over your money until you have a clear picture of your finances. However, the benefits of budgeting extend far beyond just gaining financial control. Let’s dive into the specific advantages and rewards that come with implementing a budget.
Improved financial security
Let’s face it, life can be unpredictable. But with a budget, you can gain control over your finances and build a safety net. By understanding your financial situation, you can build an emergency fund to handle unforeseen circumstances, such as medical emergencies, car repairs, or job loss. This financial security provides peace of mind and reduces the stress that comes with financial uncertainty.
Reduced stress
Financial stress can take a toll on your well-being. Whether you’re living paycheck to paycheck or worrying about money in general, it can be overwhelming and emotionally draining. A budget gives you a clear overview of your income, expenses, and financial goals. It helps you identify areas where you can cut back, eliminate unnecessary debt, and save for the future. With a budget in place, you can make informed financial decisions and eliminate the anxiety that arises from financial instability.
Better decision-making
Picture this: you’re equipped with a budget that serves as your compass. It guides you to make intentional choices aligned with your goals. When you have a budget, every financial decision becomes more deliberate and informed. By tracking your spending habits, you become aware of patterns and identify areas where you may be overspending. This knowledge empowers you to make adjustments and allocate your resources according to what truly matters to you.
Ability to achieve financial goals
A budget serves as a roadmap for reaching your financial aspirations. Whether your goals include paying off debt, saving for a dream vacation, saving for a down payment on a home, funding a child’s education, or planning for retirement, a budget provides a structured approach to allocate funds towards these objectives. It helps you track your progress, make necessary adjustments, and stay motivated on your path to financial success.
Enhanced control and discipline
Setting a personal budget promotes discipline and self-control in managing your finances. It encourages you to prioritize expenses, distinguish between needs and wants, and resist impulsive spending. By consciously allocating your income, you gain control over your money and avoid the pitfalls of overspending or unnecessary debt. Over time, budgeting becomes a habit that empowers you to make smart financial choices that align with your values.
Improved relationships and communication
Money matters can strain relationships. Budgeting is not only a personal endeavor but can also benefit relationships. It fosters open communication about money between partners or family members, ensuring everyone is on the same page regarding any financial goal, spending limits, and saving strategies. Budgeting is a couple encourages accountability and cooperation, leading to stronger relationships and shared financial success.
6 Steps to budgeting your money
Step 1: Calculate your monthly net income
You may have heard the terms “gross income” and “net income.” Gross income is the total amount you earn before taxes, benefits, and other payroll deductions are taken out. Net income is the amount of money you actually take home every month after taxes and deductions. For budgeting, you want to identify your net income.
If your sole source of income is a job with a regular paycheck, it’s pretty straightforward: tally up the total amount of all your paychecks during a month. Your employer typically subtracts taxes and other deductions from your base salary before issuing your paycheck.
You might have additional sources of income, so be sure to include those when calculating your monthly net income. This might include things like:
- Alimony payments and/or child support
- Government payments, like disability or veterans benefits
- Passive income, such as income from rental properties
- Any money you earn from a side hustle or gig work
| Tip: If you’re self-employed or have income from sources other than an employer, you might owe taxes on that money. And if you work in a contractor role, taxes will not be taken out from your income. Be sure you understand whether you’ll owe taxes on any money you make; you’ll want to account for that when you calculate your expenses in step two. |
|---|
Step 2: Gather and record your expenses
Once you know how much money is coming in, figure out how much money is going out. Make a list of everything you spend money on every month and about how much you’re spending: bills, necessities, discretionary spending, etc. It can be tough to remember everything, so do some digging by looking at your records.
You might start by reviewing statements from the accounts you use to pay for things, such as:
- Bank accounts
- Credit cards
- Digital payment apps
Other useful information about expenses might be found in statements or receipts from:
- Car payments
- Car insurances
- Mortgage documents
- Utility bills
- Investment accounts
- Email receipts
After your initial pass at tracking your expenses, consider some of the following options to help automate your tracking:
- Embrace budgeting apps: These user-friendly apps often allow you to link your bank accounts and credit cards and automatically categorize transactions and provide a visual representation of your spending patterns.
- Leverage online banking tools: Your bank’s online platform can have a treasure trove of features to help you track expenses. Explore the tools provided, such as spending categorization, transaction history, and spending alerts.
- Use expense tracking spreadsheets: If you prefer a hands-on approach, a spreadsheet can be your best friend. Create a personalized template with columns for date, description, category, and amount. Enter your expenses regularly and categorize them accordingly.
- Use the envelope system: The envelope system is a physical method where you assign cash to different envelopes, each labeled with a specific spending category. Whether it’s groceries, transportation, or entertainment, this system allows you to visualize your available funds and make mindful spending choices.
- Keep your receipts: Make it a habit to collect and store receipts for your purchases. Create a designated email folder for digital receipts and store your physical receipts in an envelope or folder.
- Account for cash transactions: Cash can be elusive when it comes to tracking expenses. Stay on top of it by jotting down cash transactions in a small notebook or using a budgeting app that allows manual entry.
Remember, effective expense tracking is crucial for accurate budgeting. Choose a method that works best for you and consistently track and categorize your expenses. Regularly reviewing your spending habits will provide valuable insights for making informed financial decisions and adjusting your budget as needed.
It can be helpful to look through 12 months of records to get a full picture of your spending. Some expenses vary from month to month, and any bill or subscription renewal that recurs yearly will only show up as a charge in one month over the course of the year. Budgeting requires being aware of and anticipating these expenses so you can plan for them.
| Tip: It can be harder to track expenses you pay for in cash; you might check your bank statements for ATM withdrawals to help jog your memory. Many people use cash for daily transactions: relatively small items you pay for every day, like lunch or bus fare. Over the course of a month, they can add up, so it may be wise to account for them in your budget. |
|---|
Step 3: Categorize fixed expenses vs. variable expenses
The next step is to begin categorizing your expenses by fixed and variable expenses. Among the easiest expenses to track are those that occur at regular intervals with the same amount, like rent or mortgage payments, your phone bill, and streaming services. These are called fixed expenses, and because they’re predictable, planning for them tends to be easier.
Variable expenses, on the other hand, shift from month to month. They fall into two categories:
- Predictable expenses that you know will occur even if you don’t know the specific amount, like groceries or utility bills
- Unpredictable expenses that you can’t easily anticipate, such as home and car repair or health care emergencies
Expenses in the predictable category may vary from month to month but will typically stay within a certain range. The longer you track your spending, the better a feel you’ll get for how much to set aside for these categories, especially when it comes to holiday budgeting. However, even these expenses can sometimes surprise you, as when gas prices suddenly rise.
Unpredictable expenses are more challenging to budget for. If you own a car, you can reasonably assume that at some point it will need repairs, but you don’t know when or how much money it will cost. For this reason, many budget experts suggest building an emergency fund for contingencies.
To get you started, here are some examples of different types of expenses:
| Fixed Expenses | Predictable Variable Expenses | Unpredictable Variable Expenses |
|---|---|---|
| Rent / mortgage | Groceries | Home repair |
| Car payment | Gas | Car repair |
| Insurance | Utilities | Medical emergencies |
| Phone / internet | Clothing | Pet care emergencies |
| Cable / streaming | Entertainment | Moving expenses |
| Gym memberships | Taxes | Pregnancy expenses |
| Tip: Trying to estimate variable expenses can feel like making a wild guess, especially if you’re a beginner figuring out how to make a budget. One way to get a sense of your monthly spending on predictable variable expenses is to add up how much you spent on them over the last year, then divide by 12 to get a monthly average. |
|---|
Step 4: Calculate your monthly income and expenses
This step is often referred to as balancing your budget; it can be the most sobering part of the process, but it may also be the most useful in planning for the future. If you want to gain any benefit from learning how to budget, you’ll need to be honest with yourself about your income and your spending habits.
Add up all your monthly income and expenses, then subtract your expenses from your income. The number will tell you whether you’re in the red or in the black. Now it’s time to balance your budget.
If you’re spending less than you earn, your income is enough to cover all your usual expenses. You can use your discretionary funds to store up for emergencies or start building your nest egg by saving or investing your money.
If you’re spending more than you’re taking in, you’re living beyond your means, and paying for things with credit cards can hide this fact for only so long. The good news is that learning how to budget will make it easier to gain control of your money. Look over your spending to see if there are areas where you can cut back, paying close attention to your non-essential spending. If you find that your spending is already at the bare minimum, you may want to look for additional sources of income.
You may also find that you’re generally in the black, but not by much, or that some months you come out ahead and some months you’re in the red. Reducing your spending on nonessential items might help you spend less than you earn more consistently and make it easier to plan for the future.
Step 5: Choose your budgeting method
You now have a clear picture of your financial situation; it’s time to start planning and tracking your spending. There are several approaches to budgeting, and each has its advocates. It’s up to you to find the method that works best for your circumstances and personality. You might even find that combining elements of different budgeting strategies makes sense for you. What’s important is that you find a way of budgeting that you can commit to over the long haul.
Here are some popular budgeting methods you might want to try out:
50-30-20 budget: The 50-30-20 budget helps you set your priorities by clearly laying out how much of your monthly income you should spend on each of three categories: 50% to needs, 30% to wants, and 20% to investing and saving. One advantage of the 50-30-20 budget rule is that it provides clear guidelines for your monthly spending while leaving flexibility to adjust as you continue learning how to budget for your personal circumstances.
Zero-based budget: A zero-based budget is just what it sounds like: you assign every dollar of income a category until you hit zero. That includes all your expense categories: necessities, nonessential spending, investing, saving, and emergency funds. Some people enjoy planning with this level of specificity because it can help you feel in control and be disciplined about paying down debt or saving money. That said, you’ll need to track your spending extra closely to make sure you stay on target.
Pay yourself first method: The pay yourself first budgeting method is oriented toward saving and puts your long-term financial goals at the top of the list of funded categories. Essentially, you begin your budgeting process each month by setting aside money for saving and investment. By prioritizing this part of your budget, you can keep your focus on building wealth; some people find it easier to cut down their spending on unnecessary things when the big picture is top-of-mind.
Envelope method: The envelope method is a classic approach that allocates the money you have on hand to your expense categories. In the most literal form of this budget, you put physical cash into envelopes marked with categories. Then, when it’s time to spend, you take the cash out of the relevant envelope; when the envelope is empty, your budget for that category is used up for the month. The envelope method is the conceptual basis for a lot of budgeting apps, including the Stash partitions feature. Take this a step further through the 100 envelope challenge.
Step 6: Set realistic financial goals for yourself and stay motivated
Once you learn how to make a budget, the final step is to put your new budget plan to use. That means tracking your spending regularly, planning out your budget for each month, and readjusting as you learn.
One of the keys to maintaining a budget is motivation: What are you trying to achieve financially? It could be a goal as modest as saving for a new couch or as ambitious as starting your own business. Keeping your focus on why you’re budgeting, and what you hope to get from it, can help you commit to the process.
Here are some tips to help you establish goals that align with your current financial situation and increase your chances of success:
SMART goal setting
Utilize the SMART framework when setting your financial goals. By making your goals specific, measurable, achievable, relevant, and time-bound, you’ll have a solid foundation for success:
- Specific: Clearly define what you want to achieve. Instead of a vague goal like “save money,” specify an amount or percentage you aim to save.
- Measurable: Make your goals quantifiable. This allows you to track your progress and know when you’ve achieved them.
- Achievable: Set goals that are realistic and within your reach. Consider your income, monthly expenses, and financial obligations when determining what you can reasonably accomplish.
- Relevant: Ensure that your goals are relevant to your financial situation, values, and long-term aspirations.
- Time-bound: Set a deadline for achieving your goals. This provides a sense of urgency and helps you stay focused.
Break goals into smaller milestones
Breaking larger goals into smaller, manageable milestones can make them less overwhelming and more attainable. For instance, if your goal is to save $10,000 for a downpayment on a house, break it down into monthly or quarterly savings targets.
Align Goals with Personal Values and Priorities
Consider your personal values, aspirations, and priorities when setting financial goals. Determine what truly matters to you and what you want to achieve in the long run. Aligning your goals with your values will provide a strong sense of purpose and increase your commitment to following your budget.
Remember, the purpose of setting financial goals is to provide direction, motivation, and a sense of accomplishment. Regularly review and reassess your goals as your financial situation evolves. Stay committed to the process and celebrate your progress along the way.
How to budget for beginners
If planning and tracking your spending is new territory, the steps above will get you started on the right foot. It may be helpful to keep in mind that you don’t have to get every detail correct from the very beginning. Your budget will always be changing to reflect your circumstances, and the more you use it the more accurate it will become. So get started now and give yourself permission to learn as you go.
The best budget is the one you stick to
Just by deciding to learn how to budget, you’ve taken an important step toward improving your financial well-being. Budgeting will do you the most good if you can make it a lifelong habit, and taking a long-range perspective can allow you some leeway. If you overspend in a category one month, try to figure out whether you’re underestimating how much you need or if you can adjust your habits to spend less. Eventually, you’ll start to get a sense of the difference between what you need and what you want. Even the simplest budget can change your approach to spending, saving, and investing for the long-term if you’re willing to commit to it over time.
Written by Tara Blaine