How to create a personal budget

Authors: Ashley Donohoe

Source: The Sacramento Bee

To succeed with your financial goals, you must closely track how you use your money. A personal budget provides a detailed picture of your income, expenses and leftover cash so you can make smart money moves, such as paying off debt or investing for your future.

Here’s what you should know about why and how to create a personal budget, including tips for setting goals and making your plan work.

What is a personal budget?

A personal budget is a plan for spending your household’s monthly earnings. You can use it to allocate your funds to cover all your expenses and track your progress. It helps you see when to make cuts on spending.

The budget starts with all your income sources and amounts. Then it has all your expenses broken down into categories. Subtracting all your expenses from your total income shows the extra money you have left to put toward your goals.

Why a personal budget may be the key to crushing your financial goals

While the main point of a personal finance budget is to manage your spending, this tool offers much more. You can use it to save for emergencies, remember your bills, plan debt payoff strategies or even work toward a good credit score.

It helps you stay on top of your bills

Making a budget requires listing all your usual bills so you can set aside sufficient funds to cover them. Tracking bills helps reduce the chances of missing a payment and facing consequences like fees or credit score damage. You can further protect your finances by setting up automatic payments.

It gives you a clearer picture of your spending habits

It’s easier to keep track of all the transactions you make in a month if you have a budget. You may not realize you’ve made several impulse purchases until you lack the cash to pay for essential expenses. A personal budget plan gives you a picture of how much you can spend and where. You can compare your current spending to the budgeted amounts to know when to cut back.

It helps you build up your emergency fund

During the budgeting process, you create goals and set aside extra cash for them. Budgeting for an emergency fund that covers several months of your expenses provides peace of mind in case an unexpected expense arises. In addition, it reduces your reliance on credit in an emergency. This means you could avoid debt that strains your finances and even contributes to a bad credit score.

It gives you greater financial freedom

Whether you want to become debt-free, live a particular lifestyle or accomplish a major goal, a budget helps you achieve financial freedom. The whole budgeting process makes you look closer at your money to prevent overspending and allocate extra funds to your savings goals. By carefully controlling your spending, you can also pay off debts sooner and have more money for what you enjoy.

How to create your own personal budget plan

Before planning a personal budget, consider what you want to achieve with your finances. That’s crucial so you can allocate your income to the right areas. In addition, you’ll need documents showing your monthly income and expenses so you don’t miss any essential items. These include pay stubs, bills, invoices, credit card statements and bank statements. You can then follow these steps to make your budget.

Set short-term and long-term goals

Personal budget planning involves reserving funds for bills and stashing away money to reach your short- and long-term goals. While time frames can vary, short-term goals usually have a deadline of at most five years. Long-term goals can take five years to multiple decades to accomplish. You’ll typically have a higher savings target for long-term goals and thus dedicate a significant amount toward them each month.

If you want financial security, you might set a short-term goal of creating an emergency fund with three to six months of your essential expenses. Other potential short-term goals include paying off credit cards, renovating your home or taking a family vacation. You may also consider saving up a down payment for a vehicle or home as short-term goals. However, these would likely take longer than building your emergency fund or paying for a vacation.

The most common long-term goal to consider is planning for your retirement. This could include putting money from each paycheck into your employer's group RRSP plan or investing in an individual retirement account. If you have children, you can consider the long-term goal of setting up a college savings fund.

Calculate all sources of income

List and add up all sources of income you receive every month. Examples include paychecks from a salaried or hourly position, freelance earnings, and investment income. Leave out any one-time bonuses or other sporadic pay.

If you have a fluctuating income source, this step can be tricky. For example, you might earn commissions or do different amounts of freelance work each month. Calculating your average monthly pay based on the last several months can help in these cases.

Categorize and add up your expenses

Next, identify your monthly expenses and their amounts. These include essential items such as food and housing, and discretionary items such as clothing and entertainment. As you work through the list, organizing them into categories may help. Below are some common categories with sample expenses.

  • Housing: Rent or mortgage payment, utilities, taxes and insurance
  • Food: Restaurant meals, groceries and food subscriptions
  • Transportation: Car payment, public transportation fares, gas, insurance and parking
  • Healthcare: Health insurance, copayments and medication
  • Entertainment: Subscriptions, concerts, movie tickets, sports games and digital downloads
  • Savings: Retirement savings, emergency fund, down payments and college savings
  • Other debts: Credit card, student loan and personal loan payments
  • Personal expenses: Child care costs, clothing, personal care items, gifts and charitable donations

When estimating the expenses, consider whether they’re fixed or variable and only occur in certain months. You can use an average amount for variable costs such as utility bills, groceries and gas. If you have an insurance payment or another cost just a few times a year, you can split the cost over the months to account for it.

Once you’ve finished, total all the expenses. You can then subtract the amount from your monthly income to determine any leftover money you can use for other purposes.

Devise an allocation strategy

Once you understand your income and costs better, consider different allocation strategies to help you achieve your financial goals. These often relate to how much money you dedicate to savings versus everyday purchases and debt payments.

A popular option is the 50/30/20 budget. This method allocates half your earnings to essential costs, 30% to discretionary expenses and 20% to savings. If you want something simpler, the 80/20 budget puts 20% toward savings but gives you freedom over the rest of your spending. If your finances allow, you can tweak both options to put more into savings.

You can also set allocations for specific expense categories if you prefer a stricter budget. For example, you could allocate 30% of your income toward housing, 15% toward food, 10% toward transportation and 5% toward recreation. You’ll likely need to tweak the percentages as prices rise or your needs change, so this option takes more work.

Review and revise your budget from month to month

As you track costs throughout the month, you’ll notice areas where you can improve your spending habits and reduce costs. For example, you might spend more than you budgeted for entertainment expenses and not put enough in your emergency fund. In this situation, you might change your allocation to entertainment and cut back in another area, or you could reassess your savings goal.

Even if you do stay on budget, you may need to revise it if your financial situation changes. You may get a raise at work, take on a side gig, or lose an existing income source. You may also need to revise your budget if your housing payment, insurance premiums or another essential expense increases. On the other hand, you could voluntarily revise your monthly budget if you’d like to allocate more funds to paying off debt or saving for a goal.

Helpful personal budgeting tips

While it can take a lot of work to create a personal budget, you can use tools to speed up the process and make monitoring your finances more manageable. You also benefit from tips on making budgeting a habit and knowing when to cut costs to improve your financial picture.

Use a personal budget template

Rather than create a budget from scratch, consider using an Excel spreadsheet or another type of personal budget template. These tools already list common income sources and expenses; you can often customize the categories as needed. If you use a spreadsheet, you also save time and improve accuracy since the formulas are already set up.

Your spreadsheet software should have many free budgeting templates to use. You can also check government, university and bank websites to download budgeting spreadsheets and templates.

Try online budgeting tools

A personal budget app or website goes a step beyond templates to make it easier to monitor your cash and spot issues quickly. You can set up the tool with your budget categories and financial goals and get handy notifications or money management tips. Some tools even connect with your bank and credit accounts to transfer transactions automatically, so you won’t need to enter them.

You may get features beyond budgeting as well. For example, the tool could include a credit monitoring feature so you can see ways to improve your credit score. Some tools also let you set up automatic bill payments or include savings trackers.

Cut out unnecessary expenses

If your income drops or your budget has gone off track, begin looking for unnecessary expenses to cut. A good place to start is with any budget category that has exceeded your planned amount. For example, you might overspend on entertainment, restaurant meals, cell phone bills or clothing. To cut costs, you could use free entertainment sources, opt for at-home meals or downgrade your phone plan.

Stick to it

Closely tracking your monthly income and expenses is essential to sticking with your budget. Otherwise, you risk overspending when you don’t know how much you’ve spent in a particular category. Using automated tools helps since you have less to track manually. In addition, seeing the real-time data may make you think twice before making impulse purchases.

Make sure you also have a realistic and complete budget. You can easily make misjudgments on budgeted amounts if you have an irregular income or forget about infrequent purchases. Plus, if you have an ambitious savings goal but a tight income, you might allocate more money to that goal than you can actually afford. Having spare cash set aside in an extra budget category can help provide a cushion for such issues.


This article is written by Ashley Donohoe from The Sacramento Bee and was legally licensed via the Tribune Content Agency through the Industry Dive Content Marketplace. Please direct all licensing questions to