A budget is a financial map that can help you plan for the future and is one of the foundations of personal finance. Through budgeting, you plan where your money goes and track your income and expenses. So whether you're looking to repay debt, save for a down payment on a home, or have a little more wiggle room, a budget can help you get there. But learning how to create a budget and finding a system that works for you can be more complicated than it looks. 

Why do you need a budget? 

It's easy to go through life without giving much thought to your finances. While it might seem more comfortable to do this, it can leave you stuck and in denial of the reality at hand. And not taking action can lead to an endless cycle of debt or living paycheck-to-paycheck or a financial plateau. You're not losing but not moving forward. 

"Budgets get a bad rep. Although many of us want to believe a budget is there to limit us, it is actually just a plan for your money. Plans are helpful because they ground us in what we want and are trying to achieve. A budget is no different," says Aja Evans, a New York-based licensed mental health counselor and financial therapist.

How to create a budget

If it's your first time learning how to create a budget, give yourself some grace and patience. Understand that budgets are meant to be changed and adjusted as you go. You'll be learning the best way—through practice. Creating a budget is pretty standard regardless of what budgeting style you use (more on that later). Below are the steps you can take to create a budget. 

Figure out the point of your budget 

Your budget is your financial system to get you where you want to go and live the life you want. If you aren't clear on what those things are, it'll be tough to budget and feel motivated to stick with the plan. 

“An important first step is to think about your short and long-term financial goals and create a budget that allows you to continually pay bills, tackle debt, save money, and invest. Finding a budget that works best for you can strengthen your overall financial wellbeing and build momentum in achieving some of these goals,” says Sabino Vargas, a certified financial planner.

When creating a budget, start by identifying your financial goals. Is it paying off debt? Saving for a large purchase or down payment? Investing for retirement? Establishing clear objectives helps you tailor your budget to align with personal priorities.

Figure out your post-tax pay

A common budgeting mistake is using your gross salary when creating a budget. For example, you might earn $60,000 annually and use that number for budgeting purposes. But that doesn't account for what Uncle Sam takes out for taxes. 

If you use your gross salary, you could be spending more than you take home. That can lead to a tight month, limited savings, or even debt. 

Figuring out post-tax pay is relatively simple if you're an employee. You can review your pay stubs to review how much goes into your bank account on payday. From there, you can multiply that number by how many monthly paydays you have to get a more accurate monthly income. 

Self-employed workers should consider setting aside a minimum of 30% of all income made toward taxes. Putting this tax money in a separate account is helpful to ensure you don't touch it. 

Add up your total expenses 

After reviewing your post-tax income, that's how much money you have to work with. To budget properly, your expenses ideally are at or lower than your income. If expenses are higher than income, that could be a red flag helping you identify that you're living beyond your means. 

The next step is to tally up your total expenses. Some expenses like housing or food are obvious. What can hurt a budget are expenses that don't have the same cadence or aren't obvious. In other words, instead of monthly expenses, you might forget quarterly or annual expenses, such as some insurance coverage, birthday parties, or that annual vet visit. 

Here are some expenses to consider for your budget:

  • Rent/mortgage
  • Utilities
  • Groceries
  • Restaurants
  • Health insurance
  • Co-pays 
  • Renter's or mortgage insurance
  • Car insurance
  • Gasoline
  • Public transportation costs
  • Clothing
  • Pet food
  • Pet supplies
  • Pet vet visits
  • Parking fees
  • Tolls 
  • Concert tickets
  • Flights
  • Hotels
  • Furniture 
  • Cookware 
  • Gym memberships
  • Massages
  • Books
  • Household supplies
  • Children's toys
  • Pet toys
  • Donations
  • Debt payments
  • Savings 
  • Investments 

You may not need all of these categories depending on your lifestyle and income. But it's easy to forget some one-off expenses like tolls or co-pays for a medical visit. 

Also, consider some surprising things like a parking ticket or an unexpected trip to see an ill family member. Life isn't linear or predictable, so budgeting needs to reflect that. For example, you could set aside $100 monthly for the unexpected. 

Most importantly, don't forget to budget for your monthly debt obligations. This should be the minimum, but if you want to pay off debt sooner than later, you should increase that amount. Debt could be weighing you down more than you think. 

"There is a bidirectional, or two-way, relationship between debt and depression. Meaning adults who have debt are more likely to have depression, and adults with depression are more likely to have debt," says licensed master social worker and financial therapist Lindsay Bryan-Podvin of Mind Money Balance.

On top of paying down debt, your budget shouldn't just include things in the present but also the future, such as savings and investments. 

Lastly, don't disregard fun or things that make you feel good. Review the expenses that directly correlate with your happiness and keep that in the budget.

Calculate how much you can afford to save

In an ideal world, your budget will help you limit your spending and allow you to save. But if you're just starting to manage your finances, you may be dealing with debt or don't yet have a handle on where your money is going each month. 

Debt repayment may take precedence, which is a saving in its own way, as paying off debt can help you lower interest costs. But, on the other hand, you want to save some amount of cash to help you avoid future debt if something comes up. 

Vargas recommends a starter emergency fund of $2,000 or half a month of expenses, whichever amount is greater. Eventually, consider boosting that amount to three to six months worth of expenses. 

To find how much you can save, look for the gap between your current income and expenses. If there is a gap, prioritize between short-term and long-term savings. This can mean having an emergency fund and saving for retirement. 

"Try to make room in your budget to at least meet an employer's matching contribution on a retirement plan, if offered," Vargas adds. 

Trying to save for an emergency fund, retirement, and other personal goals like a vacation or homeownership can be a delicate balance. This process is a long game and can take years. 

Budgeting is like working out—it's something you always will be working on and there's no finish line or end date. 

If there isn't a gap between your income and expenses, the next two tips will help you figure out a plan. 

Make some cuts if necessary

If your income doesn't match your expenses, the first thing to do is review your expenses to see if you can make some cuts. This is also important if you want to increase your savings rate or debt payoff. 

Do an audit on your expenses for the past couple of months and mark them. There should be "needs" and "wants" categories. The "wants" category is where you may find it easier to cut back, as they're not absolutely necessary to live. 

You also want to be mindful of not depriving yourself too much, which can backfire. Additionally, be aware of how stress or a bad mood can drive you toward spending. 

"It's important for people to list out all of the free coping skills they have available to them when they are sad, stressed, and overwhelmed," says Bryan-Podvin. 

This can include going for a walk, calling a friend, taking a bath, listening to music, cooking, or baking. Bryan-Podvin suggests doing these feel-good activities for at least 20 to 30 minutes. 

Cutting out your wants may be easier, but focusing on needs like housing, food, and transportation costs can make a big difference. This may mean downsizing, buying a used car or taking public transportation, and buying groceries with a list so you always have food on hand.

If you're dealing with credit card debt, you can consider debt consolidation through a balance transfer. This may offer you 0% interest to help you focus on paying off debt, not just tackling interest. Be aware of any fees associated with a balance transfer, and understand what led to the debt, so you can make changes. Oftentimes, it may be a spending issue or an income issue. 

Finally: How do you want to budget?

If budgeting has been a pain point for you, here's some good news. There are many different ways to set up a budget. If one isn't working, try another. 

"Creating a budget doesn't have to be overwhelming as there are various budgeting methods available, such as the envelope method, zero-based, paying yourself first, or a needs/wants/savings approach that you can stick with over time to get your finances under control," says Vargas. 

Here's a closer look at various budgeting styles to try out. 

Envelope budget  

The envelope budget gets back to basics and works with the money you already have. The basic concept is taking out cash and putting them in physical envelopes that act as categories. So for example, you'd have one envelope that says "Groceries" with $300 and another that says "Gas" with $100, etc. 

The pros of this budgeting style is that it can be easier to control your spending when you see the cash is dwindling. This method is often recommended for people paying off debt who may be over relying on credit. The downside is that cash can go missing or be stolen, and doesn't offer the same protections as a credit card. In other words, you won't earn rewards or get fraud protection. 

Zero-based budget

Through the zero-based budgeting system, you take every dollar that you earn and assign it to an expense as part of your budget. In other words, your income and expenses should match and the difference should be zero. 

The goal is to ensure that your money is accounted for, including your bills, savings, debt repayment, etc. So no more "how come I can't save anything this month?" or "I wonder where my money went" and instead a breakdown of where each dollar earned is going toward an expense. If additional funds are leftover, consider boosting your savings rate or paying more toward debt. 

This budgeting style is great for people who want a structure and want to eliminate spending leaks. The drawback with this budget is that it requires some discipline to spend extra money on savings and investments, and doesn't work if you're living beyond your means. 

Pay yourself first

The pay-yourself-first budget is designed to build your savings muscles and focus less on everything else. The basic gist is that if you set aside money for savings, investments, and paying off debt first, you can live off the rest and breathe easy. 

For example, if you set aside 10% toward savings and 15% for retirement, and pay your debt, the main things moving the needle forward are taken care of, and you don't have to worry so much about splurging on take-out. 

This is sometimes called reverse budgeting and is good for people who crave discipline and don't want to analyze every expense. People living paycheck-to-paycheck may not be able to use this budget type. Others should evaluate periodically and adjust percentages as income grows. 

50/30/20 budget 

The 50/30/20 budget may be for you if you do well with benchmarks. This budgeting method states that you should have 50% of your expenses go toward needs, 30% toward your wants, and 20% toward any debt obligations and savings. 

If you crave structure and need a place to get started, the 50/30/20 rule can help. It can show you some areas that might be hurting your budget. These benchmarks can be useful if you see you’re way overspending on your needs, at the cost of your savings and other budget categories. 

Use a budgeting app to track expenses to determine where your money is going. By categorizing your spending, you can pinpoint the categories where you're spending too much.

If you're looking to have rules to stick to, the 50/30/20 budget could be a good place to start. However, this budget isn't ideal for people who want to pay off debt quickly or pursue financial independence. 

Small steps make budgeting sustainable

Starting a budget can feel intimidating if you've never done it or if you feel like you've "failed" before. Like with any other habit, start small and continue day by day. 

If you jump in and immediately slash expenses, it could backfire and create some emotional revenge spending. Instead start where you are. 

Look at your take-home pay and your current expenses. Slowly start to cut back. Use a budgeting app to track expenses and review your accounts. Make small changes that feel doable, so you can feel that win. 

And if you mess up? It's okay, you're completely normal and it happens to everyone. Start over again and remind yourself of your financial goals. 

Other ways to start saving

As part of your budget, you want to find the right savings vehicle to grow your money. These might vary based on your short-term and long-term goals. 

Standard savings accounts 

Your bank may offer regular savings accounts and can be a place to save money that is convenient. However, the convenience won't earn you great interest rates so it can be tough for your savings to grow. 

High-yield savings accounts

Using a high-yield savings account, you can save up for your emergency fund and earn interest on what you put away. As the name suggests, you get a higher interest rate compared to a standard savings account. 

The positives are that you earn more and can access your funds any time you want. On the other hand, it may not earn you as much as some other savings vehicles. 

Money market accounts

Money market accounts (MMA) can be a great savings vehicle as well and earn consumers more interest than traditional savings accounts. MMAs are a way to save and earn but generally have a higher minimum deposit to get started. 

Certificates of deposit (CD) 

Certificates of deposit are a great tool to put away funds that you can lock away for a period of time. In exchange for doing so, you generally get a higher interest rate than other savings vehicles. The downside is that you may face penalties if you take out your funds before your maturity period. 

This article was written by Melanie Lockert from Fortune and was legally licensed through the Industry Dive Content Marketplace. Please direct all licensing questions to legal@industrydive.com.

The opinions expressed within this article is that of Melanie Lockert and not that of M&T Bank, nor does M&T Bank endorse the opinions.

This article is not intended to provide tax, legal, accounting, financial, or other professional advice. Always consult a qualified professional about your personal situation.