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How to Make a Personal Budget – 5 Steps to Get Started

Budgeting can feel overwhelming. So overwhelming, in fact, that most Americans avoid creating and keeping one. A 2020 Mint survey found that nearly two-thirds (65%) of Americans don’t know how much they spent last month.

But if you want to reach your financial goals, you need to organize your finances.

How to Make a Personal Budget – Step-by-Step

As a first-time budgeter, follow these steps to make the process as fast and painless as possible.

1. Start With Your Savings Rate

Your savings rate — the gap between what you earn and what you spend — determines your wealth and financial success. Not the sexiness of the car you drive or how posh your ZIP code is, but how much of your income you put toward building wealth each month.

Aim for at least 10% of your net (after-tax) income, plus the entirety of your tax refund. But the higher your savings rate is, the faster you can create passive income and retire early if you wish. My wife and I save roughly 60% of our household income for accelerated results.

If you owe unsecured debts, such as credit card balances or personal loans, your monthly savings can go toward paying them off first. Once that’s done, apply for a secured credit card like the Cleo Credit Builder Card. This credit-building beauty’s benefits include:

  • No credit check when you apply
  • Low security deposit requirement and the option to add to it whenever you get paid
  • Cash-back rewards on eligible purchases
  • Cash advances (terms apply)
  • Automatic bill pay
  • Seamless integration with Cleo’s budgeting tools
  • Check your credit score in your account dashboard

With your spending in check and your Cleo Credit Builder Card activated, you’re ready to direct your savings toward longer-term goals.

Set your savings goal first. The rest of budgeting is an exercise in how to achieve it.

2. Create a Budget Spreadsheet

You don’t have to be an Excel whiz to put together a simple monthly budget. You don’t even need to create it yourself — try our sample budget template in Google Sheets.

The spreadsheet should include four categories: savings, income, expenses, and financial summary. You already set a savings amount, so write that in first.

Now you can go about plotting a route to reach that savings rate.

Pro tip: If you want to make budgeting with Google Sheets or Excel even easier, you could sign up for Tiller. After connecting your bank account and credit cards, Tiller will automatically pull transactions and update your Google Sheets or Excel budget. They also offer a free 30-day trial so you can make sure it’s right for you.

3. List All Monthly Income Streams

Start with your full-time job or main gig income. List your pretax income, then the amount of taxes taken out by your employer (if applicable). Then list your take-home pay.

If you get paid weekly or biweekly, list four weeks’ of income here, not your theoretical monthly income based on 52 weeks’ pay divided by 12. Four weeks’ income is all you can count on in any given month, so your budget for monthly expenses must fit that. In the months when you collect a “bonus” paycheck, you can put it toward savings or paying down debt. Or, if you must, toward a separate account for irregular expenses such as gifts.

Then list out all additional active income streams, such as side hustles. Don’t forget to subtract out taxes for these, as you’ll owe estimated quarterly taxes for them.

In a separate side section, list out your passive income streams as well.

4. List All Monthly Expenses

Your monthly expenses fall into two broad categories: mandatory and discretionary. The term “mandatory” is misleading, as there’s almost always a way to avoid paying even these expenses. And you can always spend less, even on mandatory expenses.

Still, the separation of mandatory and discretionary expenses helps remind you where you have the easiest room to adjust your spending on a month-to-month basis.

Mandatory Expenses

While you can find creative ways to reduce or avoid these expenses, most financial experts call these mandatory living expenses.

  • Housing. You need a roof over your head. You don’t necessarily need to pay for it yourself, as house hacking demonstrates, but you do need a place to call home. When you look for a new home, reframe the question from “What’s the most I can afford?” to “What’s the least I can spend on housing and still be happy?”
  • Transportation. Depending on where you live, you may or may not need a car. But even if you do need one, you don’t need to buy the most expensive car you can afford. You don’t need a status symbol. Buy the least expensive car that meets your needs if you want to build wealth faster.
  • Groceries. You need food to live. But that doesn’t mean you need filet mignon. Try out these easy ways to save money on groceries.
  • Utilities. While you do need Internet, water, electricity, and possibly gas, you don’t need cable TV or a landline phone. And you can always lower your utility bills.
  • Health Care. Everyone needs health insurance. But health care expenses could mean a combination of a high-deductible health plan with HSA contributions. There are other ways to save on medical expenses too.
  • Child Care. If you have children under school age and no available family members to watch them, you have to pay someone else to do so. But that doesn’t mean it has to break your budget. Try these tips to lower your child care costs.
  • Debts. As long as you have debts, you keep bleeding money to them each month. Knock out unsecured debts such as student loans or credit card balances quickly with the debt snowball method. The sooner you pay off your debt, the sooner you can start putting your savings toward building wealth and other long-term goals.

Discretionary Expenses

We all need rest and relaxation, and sometimes that involves spending money. There’s nothing wrong with that. Just make sure you acknowledge that you have complete control over these expenses and not a single one is mandatory in your budget.

  • Food and Drinks Prepared by Someone Else. From pricey dinners out at restaurants to your morning Starbucks coffee, food and drink you don’t make yourself is a luxury, not a mandatory expense. That also goes for weekday lunches, fast food, takeout, delivery, happy hours, and any other food or beverage you pay someone else to prepare for you.
  • Clothing and Accessories. People love to justify their spending on clothes as a necessity, but it’s not. To protect yourself from the elements, you could spend a few dollars per year at Goodwill. I once went a year without spending a dollar on clothing, just to prove that point to my wife (she remained unimpressed, sadly). Spend as much or as little as you like on clothes, but do so knowing it falls under discretionary rather than mandatory spending.
  • Cosmetics and Personal Products. People love to sneak this into their grocery budget by buying products like moisturizers and makeup at the grocery store. And while you can make a case that you do need a moisturizer or makeup essentials, you don’t need the shishi brand. Again, spend what you like, but don’t delude yourself about it.
  • Electronics. Do you need a smartphone? Probably. Do you need the latest model? No. And even when I buy a late-model cellphone, I usually buy it used but in excellent condition. It costs a small fraction of buying the latest model new and works just as well.
  • Alcohol and Tobacco. A pack-a-day smoker blows $2,292 per year on cigarettes at the average pack cost of $6.28, according to It’s essentially paying money to shorten your life expectancy. Likewise, alcohol quickly adds up to thousands of dollars per year for frequent tipplers.
  • Gifts. Holidays, birthdays, baby showers, bridal showers, wedding showers, anniversaries … gifts for these special events all add up. Or at least they can if you don’t set a strict budget for them and set aside money for them each month in a separate account.
  • Entertainment. Whether concerts, museums, amusement parks, movie theater tickets, or any other form of paid entertainment, you can quickly spend a lot of money to pass the time.
  • Travel. I love to travel and spend far more on it than the average American. But that’s where I choose to put most of my discretionary budget. And I still use every trick in the book to save money when I travel.

5. Review & Adjust Your Numbers Regularly

After entering all of the above in your budget spreadsheet, does the bottom line achieve your target savings rate?

When making their first budget, many people underestimate their discretionary spending, and they don’t like what they see when they actually track this spending. So they give up on budgeting as “too hard” and go back to doing whatever they did before.

Don’t make that mistake.

Track Your Spending Each Month

Every month, track what you spent in each category. If you struggle to track it, try using the old-school envelope budgeting system. It may seem quaint, but it works far better than most high-tech budgeting solutions.

Alternatively, try using a budgeting tool like YNAB or Pocketsmith, which tracks both your spending and your net worth.

Adjust Your Spending as Needed

Life is full of surprises. Food gets more expensive, gas prices rise, and rent is hiked when you least expect it. Each time you notice inflation creeping up on your expense categories, get a raise at work, or suffer a financial setback like a pay cut or job loss, you must adjust your expense categories based on your new reality.

Which says nothing of plain, vanilla overspending — something you’ll probably do in the first few months of adapting to your new budget.

Remember, the whole point of implementing your new budget is to save more and live on less. That means breaking old spending habits and sacrificing some of the luxuries you previously allowed yourself. Spending less may not be fun, but it gets easier as you create new habits — and as you start seeing the fruits of your labor.

Update Your Financial Summary Monthly

The fourth section of your monthly budget spreadsheet is your financial summary. It allows you to watch your wealth and passive income grow and compound each month, as well as watching yourself get closer to your long-term financial goals like buying a house, covering your children’s college tuition, or retiring early.

I keep it simple, tracking just three numbers. First, I track my actual savings rate for the previous month. Did it match (or, ideally, exceed) my target? Or did I blow my budget?

Second, I track my investable net worth. That ignores home equity, as you don’t realize that money until you sell your home, and you can’t invest it to compound on itself. While you can calculate your net worth manually each month, a free budgeting app can track it automatically.

Finally, I track my FIRE ratio (short for financial independence/retire early). It’s simpler than it sounds — just the percentage of your monthly living expenses you can cover with passive income. If you spend $5,000 per month and bring in $1,000 in passive income, you have a FIRE ratio of 20%. When you reach 100%, you reach financial independence and no longer need your job to pay the bills. You can go spend the rest of your life doing whatever you want.

It only takes a few minutes each month to track these numbers. But as they say in business, that which gets measured gets done, and by measuring your progress, you keep it both tangible and front-of-mind.

Automate Good Behavior

They say budgeting your personal finances is not a math problem but a behavior problem. So take behavior, willpower, and discipline out of the equation.

Set up automated transfers every payday from your checking account to your savings account. Or ask your employer to split your direct deposit, with some going straight into your savings account.

Automate all your recurring payments, such as your mortgage and car payments. Every dollar you remove from your operating account before you have a chance to spend it reduces your temptation to spend more than you budgeted.

You’re In Control

Your monthly budget is a living, breathing animal that evolves, not a one-time project. Just as you write in your initial income and spending targets, you can rewrite it as you go.

For some, that means giving up and accepting a lower savings rate. For people who are serious about building wealth, that means continually finding ways to lower their expenses and raise their income.

Start with simple ways to save money, such as replacing cable TV with a video streaming service or cutting out sodas and other sweetened beverages. Then explore higher-impact savings options such as house hacking or getting rid of a car.

But don’t stop at playing defense by slashing spending. Play offense as well by finding ways to earn extra money. That could mean negotiating a raise, finding a new job, earning additional degrees or certifications to change careers, or starting a new side gig.

Most importantly, don’t succumb to lifestyle inflation. As you earn more, restrain from spending more!

And as you receive “bonus” money, whether from an extra paycheck in a month, a tax refund, an inheritance, or an actual bonus from work, put it toward building more wealth and passive income, not a new jacket or fancy dinner out.

Final Word

Too many people struggle over how to make a budget. Creating the budget itself is easy — it’s changing your behavior that’s hard.

Internalize the paradox of wealth: The more you spend to look and feel wealthy, the less wealth you actually build. Real wealth exists on paper in your IRA, your brokerage account, your emergency fund, and the equity in your investment properties.

It’s not sexy. It doesn’t look like sports cars or ritzy homes, private jets or summer homes in Spain. But real wealth doesn’t look like spending; it looks like having the financial freedom to live the life you want.

G. Brian Davis is a real estate investor, personal finance writer, and travel addict mildly obsessed with FIRE. He spends nine months of the year in Abu Dhabi, and splits the rest of the year between his hometown of Baltimore and traveling the world.