Budgeting Basics: How to Create a Budget That Works

Budgeting is one of those activities that can pay dividends – literally! However, building and sticking to a budget can be daunting, particularly as you try to align categories with your real-life spending. Is Chipotle a want or a need? What about Starbucks (just kidding, it’s absolutely a need).

Whatever tools or methodologies you decide to use, all budgeting concepts start with the same goal: understanding how you spend your money. If you are struggling to find extra money at the end of the month or trying to put more toward future financial goals, learning how to create a budget can make a meaningful difference. This guide walks through practical steps and budgeting tips to help you better manage your money and start saving with purpose.

How Do You Calculate Your Monthly Income for a Budget?

Before you can create a budget, you need a clear picture of how much money you have coming in each month. Start by identifying your take-home income, which is the amount you receive after taxes, benefits, and other deductions. This gives you a realistic number to work with when building your budget.

When calculating your monthly income, be sure to include:

• Regular paychecks
• Side income or freelance work
• Any consistent deposits you rely on

If your income changes from month to month, use an average to estimate your monthly total. Knowing this baseline makes it easier to plan your spending, set savings goals, and decide where adjustments may be needed.

Why Is Tracking Your Spending the First Step in Budgeting?

The purpose of budgeting is to gain a clear understanding of where your money is going, which starts with tracking your spending. Using a debit or credit card for purchases can help create a paper trail, making it easier to review your spending habits and identify patterns.

Try tracking your spending for 30 to 60 days to get an accurate picture of your typical expenses. Be sure to include items that are easy to overlook, such as:

• Subscriptions and recurring services
• Small daily purchases
• App or online purchases

These smaller expenses can add up quickly and often reveal opportunities to adjust your budget.

How Should You Group Your Expenses in a Budget?

Once you have a clear picture of your spending, the next step is to group your expenses in a way that makes sense to you. Common categories may include:

• Household necessities
• Groceries
• Transportation and auto maintenance
• Dining out and entertainment

Grouping expenses helps you see how your money is being allocated and makes it easier to spot patterns in your spending. Most major banks will automatically categorize transactions, and there are also free apps that can help with this step. These tools are helpful, but they are not always perfect, so it is important to review and adjust categories as needed.

As you group expenses, it can be helpful to separate needs from wants. Needs typically include essentials such as housing, utilities, groceries, insurance, and transportation to work. Wants are expenses that add convenience or enjoyment, such as dining out, streaming services, entertainment, or upgraded purchases. Understanding this difference can highlight areas where spending could be reduced or redirected.

Needs vs. Wants: What’s the Difference?

After everything is grouped, calculate the average monthly spending for each category. Knowing these averages allows you to compare your spending to expectations and identify opportunities to cut back or put more money toward savings and financial goals.

How Do You Compare Your Income and Expenses in a Budget?

Once you understand your income and have grouped your expenses, the next step is to compare the two. Start by subtracting your total monthly expenses from your take-home income. This shows whether you are living within your means or spending more than you earn.

When reviewing the results, consider the following:

• If expenses exceed income, look for areas where spending can be reduced, especially within “wants”
• If income exceeds expenses, decide where that money should go rather than letting it disappear
• Treat savings as a line item, just like rent or utilities

Setting aside money for savings, an emergency fund, or future goals helps ensure progress and keeps your budget working for you over time.

Budgeting Tips to Help You Stay on Track

Creating a budget is an important first step but maintaining it over time is what leads to lasting financial progress. Small, consistent habits can make budgeting feel less overwhelming and more realistic as your circumstances change.

• Start small and adjust over time: Your first budget does not have to be perfect. Begin with broad categories and refine them as you learn more about your spending habits. Making gradual adjustments can help prevent frustration and burnout.
• Review your budget monthly: Checking in on your budget each month allows you to account for changes in income, expenses, or priorities. Regular reviews help keep your budget aligned with real life rather than letting it become outdated.
• Plan ahead for irregular expenses: Not all expenses happen monthly. Annual bills, car repairs, holidays, or seasonal costs can disrupt a budget if they are not planned for. Setting aside a small amount each month for these expenses can help avoid surprises.
• Build flexibility into your budget: Life changes, and your budget should be able to change with it. Allowing room for adjustments makes it easier to stick with your plan when unexpected expenses arise.

These budgeting tips can help keep your plan realistic, adaptable, and easier to maintain over time.

Budgeting Strategies to Consider

There is no one-size-fits-all approach to budgeting. Different strategies work for different people, depending on income, spending habits, and financial goals. Exploring a few common methods can help you choose an approach that feels manageable and sustainable.

• 50/30/20 budget: This approach divides your income into three general categories: needs, wants, and savings. It offers a simple structure and flexibility while still prioritizing saving.
• Zero-based budgeting: With this method, every dollar of income is assigned a purpose, whether it goes toward expenses, savings, or debt. This strategy works well for those who want detailed control over their money.
• Envelope system: This strategy sets spending limits for specific categories. While it is often associated with cash, digital tools can also be used. It can be helpful for managing discretionary spending.

Common Budgeting Strategies at a Glance

Trying different budgeting strategies, or combining elements from more than one, can help you find an approach that supports your financial goals and fits your lifestyle.

Final Thoughts

Creating a successful budget starts with understanding your income, tracking and organizing your spending, and making intentional decisions about where your money goes. By comparing income to expenses, identifying needs versus wants, and choosing budgeting strategies that fit your lifestyle, you can build a budget that is realistic and sustainable. With regular reviews, flexibility, and savings built into your plan, budgeting becomes a practical tool to help you manage your money, prepare for the unexpected, and work toward your financial goals with confidence.

If you have questions about budgeting or want help putting a plan into action, the team at Forward Bank is here for you. We take the time to understand your financial situation and help you make informed decisions that support long-term stability and growth.