How to make a budget: The ultimate guide

Author: Maria Smith

Source: MapleMoney

Making a budget can be one of the most fundamental money actions you take. A budget is a money blueprint and a financial plan to help direct your spending, saving, and debt repayment. But you don't have to feel overwhelmed in making a money management plan. Here is how to make a budget in 5 simple steps and what you can do before and after creating a money plan to ensure its success.

Why budgeting is important

Making a budget can help you manage your money and feel more in control of your finances. It is not about depriving yourself, but rather about giving each dollar a purpose and living within your means, developing a sense of freedom with your money.

A well-thought plan can help guide your spending and track your income, expenses, debt, and savings.

Budgeting can also help with financial overwhelm and running out of money before your next paycheque.

By including sinking funds, you can better plan for major purchases avoiding having to go into debt.

And being aware of your spending can also help to reduce your costs. Just the act of creating a budget has shown to decrease spending.

Before you make a personal budget plan

Budgeting may be one of the most important financial moves you make. And it is an optimal first step. But there are some things you can do first to help you get prepared. Let's dig into what you need to know before you create a budget plan.

Know your goals

Having clearly written down short-term and long-term goals can help you financially plan for them. If something is important to you, then you will want to make sure it is a priority in your spending plan.

Before you make a budget, take some time to outline what your short-term and long-term goals are. If you have a partner, this can be a great exercise to do together. The goals you set can help shape your future budget.

Here are some financial goal examples for you to think about:

Short-term goals – saving for a downpayment on a home, saving for a holiday, paying down debt, buying a new car

Long-term goals – retirement, being mortgage-free, saving for college/university tuition

Track your spending & monthly expenses

If you want your budget to be successful, it's a good idea to start with realistic numbers and not just ballpark amounts or estimates. To get accurate numbers for your expenses, track your spending for a few months before creating a budget.

Tracking your spending can be done by keeping all of your receipts or monitoring your credit card bills and bank statements if you are a credit or debit card spender.

It's a good idea to track your spending for a few months because some expenses may not come up every month. And other costs may be variable, so monitoring for a few months helps you get a more accurate average to use.

Compile your paperwork

Once you've tracked, your expenses have all of that information handy when you sit down to create your budget. You will also want to have a record of your income (pay stubs can be good for this).

And because some expenses only happen once a year (property taxes, life insurance, annual membership dues, for example), get out a calendar for this step too. Go through each month and take note of when major or annual expenses come due. This information will be valuable later when creating your monthly money plan.

Why do you want a budget?

And finally, before you create a budget, take some time to really think about why you want a budget. Having a solid reason for doing something can be very motivating. This motivation can help you stick to the budget when times get tough. And when it comes to money, there is a good chance that times will get tough at some point or another.

Here are some reasons why people create budgets:

  • Pay off debt faster
  • Save up for a major purchase
  • Take control of their finances
  • Don't want to wonder every month where their money went
  • Achieve their money goals
  • Get on the same page as their partner

How to make a budget

Creating a budget can be done in 5 steps. Here is your guide on how to make a budget.

Step 1 – Record your net income

Whenever you are working with your budget, you want to use your net income. This is also known as your after-tax income or take-home pay.

Creating a monthly budget is the easiest way to start. Monthly paycheques make recording your net income easy every month.

Always use your base net income. Bonuses, raises, and commissions can be irregular, so have a plan for irregular income, but don't count on it every month.

If your paycheques are anything other than monthly, total up your annual net pay and divide it by 12 to get a monthly number. Or you can choose to budget per pay period (biweekly, bi-monthly, etc.).

The only tricky part of this step is irregular paycheques if you are a gig worker or freelancer, for example. If that is the case, try taking 3 months, or plan for the lowest months and adjust in the higher months.

Step 2 – List all your expenses by category

Because you have already taken the time to track your monthly expenses and compile your annual expenses, this step can be pretty straightforward. For any of your yearly expenses, divide them by 12 for a monthly budget. When coming up with your category totals, think of them as spending limits.

There are 3 main ways that you can categorize your expenses:

Fixed vs. variable

Fixed expenses are all of those that are known in advance and are consistent month to month. Examples of fixed expenses are rent/mortgage payments, vehicle payments, childcare, and monthly property tax payments.

Variable expenses are those expenses that vary month to month. You may know how much you spend in each category, but that amount can fluctuate month to month. Examples of variable expenses are food, entertainment, and clothing.

Needs vs. wants

Needs are all baseline expenses required to live. Examples of needs may be rent/mortgage payment, transportation, childcare, and food.

Wants are all of the expenses beyond your basic needs. Some examples of wants may be transportation, clothing, and entertainment.

Needs and wants may differ from person to person. If you live near public transportation, you may not need a car, but if you live in an area with no public transit, then a vehicle may be a need.

Even though needs and wants can differ from person to person, be careful not to classify your wants as needs. Needs are the necessities.

Detailed categories

Personally, I think that detailed categories are the best way to categorize your spending. Not only do detailed categories include your fixed and variable expenses and needs and wants, but they also provide a clearer picture of your spending.

Here are 20 budget categories you may want to consider in your budget:

  • Mortgage/Rent
  • Utilities
    • Electricity
    • Water
    • Gas
  • Cell Phone
  • Donations
  • Fuel (vehicles)
  • Car Insurance
  • Home/Tenant Insurance
  • Groceries
  • Eating Out
  • Entertainment
  • Pets
  • Public Transportation
  • Housekeeping
  • Annual Memberships
  • Travel
  • Sinking Funds
  • Fun Money
  • Bank Fees
  • Gifts
  • Vehicle Maintenance

Step 3 – List all your debts & minimum payments

Now that you have included your income and monthly expenses, it is time to include any debt repayment not been previously accounted for. If you have a credit card payment, student loans, or other loans, you will want to include their minimum payments in your money plan.

We always want to include the minimum payments for any debt as a necessity. Then any extra money you can allocate to paying off your debt faster if you so choose.

Step 4 – Include your money saving goals

Because you have already considered your long and short-term money goals, you should have an idea of how much you would like to allocate to savings every month. In this step, write that number down.

You may also choose to set aside money into various sinking funds if you have not done so in a previous step.

Step 5 – Total your income & expenses/debt servicing/savings and review

In each previous step, you have come up with a list of numbers. Now it is time to see how they all add up together.

First, add up all your sources of net income from step 1. Then subtract all of your expenses from step 2, debt minimum payments from step 3, and savings from step 4.

What's your final number?

Suppose you have a positive number that means that your income is higher than all your expenses/debt/savings that is a good problem to have. You can choose to allocate any extra money to debt repayment or savings.

If your number is zero, congratulations, you have achieved a zero-based budget. Every dollar that you earn has a role. But a word of caution, sometimes when your first budget is that exact, there is little room for error.

And, if your number is negative, that means that you are spending more than you make every month. Look for areas to cut or negotiate. Remember having a budget is not about deprivation, so don't try to cut everything. But look for expenses that don't align with your values or expenses that you may be able to keep but negotiate a lower rate on.

Types of budget systems

Although the above 5 steps for how to create a budget are universal, there are many different types of budgets that you can consider. Each type has its positives and negatives, and it may take you a few months to play around with each type until you find one you want to stick with.

Here are a few different budget styles you may choose to look into:

•             50/30/20 Budget

•             Zero-Based Budget

•             Envelope Budgeting System

•             Budget Binder

•             Highlighter Budget

And if technology is more your thing, you can create your own budget spreadsheet to keep track. The Government of Canada website has a great free online budget planner tool.

After you've created a budget plan

Now that you've gone through making a budget, there are a few things that you can do to help ensure your success with your new money plan.

Monthly review and tweak

One of the most important things you can do with your newly created money plan is to review it monthly. Very rarely do we get our budgets 100% right on the first try. Your money plan is flexible and adaptable to your lifestyle.

Schedule time into your calendar every month to review your budget and spending. Keep track of the budgeted amount for every category and what you actually spent.

If you find that there is money left over every month, come up with a plan for what you would like to do with it. Spending it is okay sometimes, but you may also find it very rewarding to pay off debt faster or accelerate your savings.

When you do take the time to review your numbers, give yourself some grace. It may not be perfect for the first few months, and even later on, there may be months that you blow your budget. But go back to why you are budgeting, identify what went "wrong" that month, and make a plan to adjust in the future. One bad month doesn't mean you should stop budgeting.

How will you hold yourself accountable?

It's great to go through the exercise of making a budget, but how will you hold yourself accountable for it? Here are a few tips that may help:

  • Tell someone about your budget – whether it be a family member or friend, recruit someone to be your accountability partner.
  • Find a budget style that helps keep you accountable – the cash spending of an envelope budget system can really help with this.
  • Use a budget app – some apps can help keep you accountable, and they even find ways to help you save money.

Family meetings

Scheduling a family meeting is a great way to get the whole family on board with a budget. Younger children do not always need to know all the details, but involving them can help to teach them about money as they grow up.

Your family meetings can be a place to discuss the general budget and how it aligns with your family's goals. Children may be more likely to buy into the plan if they understand what it is and how it may affect them.


If your budget has line items for debt payment, sinking funds, or your short and long-term goals, take some time to think about how you will celebrate the achievement of these milestones.

Celebrating your achievements doesn't have to cost a lot (you don't want to break your budget). But planning to celebrate can help keep you motivated along the way and is a critical step in enjoying your life. Remember, a budget isn't about deprivation. Give yourself the freedom to celebrate now and then.

10 Budgeting tips

When it comes to budgeting, like anything else, we could all use a little help from time to time. Here are 10 budgeting tips to help you stick to your money plan.

  • Budget for fun money. Having fun money or cash category can provide a buffer in your budget. It can also help you feel guilt-free when spending money on yourself.
  • Automate your finances. The more you can automate your finances (bill payments, savings), the easier it will be to stick to your budget.
  • Separate each bank account. By keeping your chequing and savings accounts separate, you are less likely to spend your savings. You can even take it one step further and have your chequing and savings accounts at different banks. Bonus tip – automate the transfers to your savings account.
  • Only use your credit card if you have the money. Credit cards are not a source of income. Make sure you have the money in your account before using a credit card to make a purchase.
  • Don't be afraid to make changes. If your budget isn't working for you, you can change and update it. Comparing your budget numbers to your actual spending for the month can help you tweak your spending plan.
  • With the leftover money, prioritize saving. There will be some months when you have money left over at the end of the month. Make a plan for this money and try to avoid spending it mindlessly.
  • Always use your net income because taxes are a reality. Using your after-tax income will make your budget more realistic.
  • Use realistic numbers. Don't just estimate your spending. Track it and use real numbers when coming up with your budget category totals.
  • Look for simple moves with significant effects. Sure, coupons are great, but if you can save hundreds of dollars a month by not having a car payment or getting a roommate, you will see a more significant impact on the income side of the equation.
  • Update your budget when life changes. When life changes, so should your budget. Are you expecting a little one? Update your budget to reflect that. Just got a raise at work? Make a plan for the extra income.

This article was written by Maria Smith from MapleMoney and was legally licensed through the Industry Dive publisher network. Please direct all licensing questions to