How to Create a Budget

By Jennifer Tucker
July 11, 2023 | 6 Min. Read

Your budget, sometimes known as a spending plan, is an important tool for money management. Knowing how to create a Budget can help you get a handle on your finances by tracking your income and expenses and setting goals.

When done right, budgeting can help you find financial freedom. Whether you want to build your savings, pay down debt, or build your credit, creating a budget is a step in the right direction.

What is budgeting?

Simply put, budgeting is tracking money in and money out. When you create a budget, you’ll list your income and expenses and determine whether you’re operating at a surplus or a deficit. If your income exceeds your expenses (you have a surplus), you’re likely on the way to achieving your financial goals. If your expenses exceed your income (you have a deficit), you may need to make some changes to your spending and saving habits.

Why is budgeting important?

Month to month, funds flow in and out of our checking accounts. And in the age of digital banking, it often happens without us giving it a second thought. So you might wonder, “What is the purpose of budgeting?”

Creating a personal spending plan helps you gain greater awareness of your spending habits. It can help you keep track of money in and money out, set goals, and ultimately gain financial control.

Following a budget can be tough, but it’s important to remember that it’s not set in stone. Your spending plan will change at different stages of your life and financial maturity. If you’re just starting out, a budget can set the foundation for your financial journey. Changes in your life that impact your financial situation—like a job loss or starting a family—will require you to make updates to your budget to match up with new goals.  

Once you learn how to budget effectively, you’ll be better equipped to ebb and flow with the changes.

Benefits of budgeting

The benefits of creating a spending plan are wide-reaching and can span from relieving financial stress to achieving long-term goals. Building a budget and following a spending plan can help you:

Better manage your money

A budget can help you spend within your means, pay bills on time, create emergency funds, and save for major purchases. And all of this can help you build your credit, too.

Build assets

Sticking to a budget will help you achieve your savings goals and build assets that can improve your financial well-being in the long term. Following a budget will help you work toward financial independence.

Find clarity

Having a budget will help reduce uncertainty and anxiety around whether you have enough money in your bank account to pay bills or meet your savings goals. This clarity can help you gain peace of mind about your finances.

Gain control

Following a spending plan can give you greater control over your finances rather than letting money control you. A solid understanding of your income and expenses will allow you to make smart financial decisions.

Building your budget

There are a lot of different ways to budget. Before you get started building your spending plan, it helps to understand what budget planning means and which type of budget will work best for you.

What is budget planning?

Budgeting might also be referred to as budget planning. Budget planning is the process of creating a spending plan, or a comprehensive accounting of your income and expenses.

When you make a budget plan, you’ll tally all your sources of income and compare your earnings to your fixed and variable expenses. Fixed expenses are expenses that don’t change much month to month: think of your rent or mortgage, car insurance, or phone bill. Variable expenses can go up and down: think of things like groceries or gas, as well as discretionary spending like dining out or non-essential shopping.

What are the different types of budgets?

There may be as many different types of budgets as there are unique financial goals! Here are a few of the most common budget types and budgeting rules you might hear about:

The Traditional Budget

A traditional budget is a good starting point for anyone just getting started with budgeting. With traditional budgeting, you’ll use your past income and expenses as predictors of your future financial situation and use that information to create a new budget. You can make incremental adjustments as your income or expenses change throughout the year.

The Zero-Based Budget

Instead of relying on your past income and expense trends, you may want to start your budget from scratch each year. With zero-based budgeting, you’ll assess your current financial situation and decide which expenses to keep or eliminate. Then, you’ll allocate your income between expenses, savings, and debt repayments. The goal is for your budget to balance to zero each month when calculating your income minus expenses/savings/debt pay-down.

The Flexible Budget

Once you have a handle on budgeting, a flexible budget might be a good option for you. It allows for variation in income and allows you to adjust expenses accordingly. So, if you bring in more or less money during one month, you can tweak your expenses to stay in balance.

The 50-20-30 Budget

The 50-30-20 budgeting rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. “Needs” might be defined as basic living expenses, like rent or utilities. “Wants” are discretionary spending, including things like eating out or going to concerts and sporting events. Your savings can help you achieve both short- and long-term goals.

The 40-30-20-10 Budget

The 40-30-20-10 budgeting rule suggests that you put 40% of your money toward your savings, 30% towards needs, 20% towards wants, and 10% toward contributions like donations to charity or important causes.

How to budget

There may be many different types of budgets, but the path to creating any spending plan is the same. It can be boiled down to these 6 simple steps:

  1. Gather your financial information.
  2. List your sources of income.
  3. List your fixed and variable expenses.
  4. Tally up and compare your income and expenses.
  5. Set a goal and make a plan.
  6. Review your budget monthly and make adjustments.

Ready to build your spending plan? Take a deep dive into the steps in budget planning.

What are the best budgeting tools?

The web is awash with tools and resources that can help you build your budget and make a spending plan. A simple sheet that tracks your money in and money out is usually the easiest way to get started. You can create your own budget spreadsheet or download an existing resource, like an Excel budget template or Google Sheets budget template. From there, all you have to do is:

  1. Create categories for your income and expenses.
  2. Set your budget period (weekly, monthly, or annually).
  3. Enter your numbers and use simple formulas to calculate your budget.

Here’s an example of what your budget spreadsheet might look like:

Monthly Income Fixed Monthly Expenses
Public Assistance$Car Insurance$
Child Support$Cell Phone $
Social Security $Child Care$
Other$Variable Monthly Expenses
Utilities $
Groceries $
Eating Out$
Credit Card Payments $
Total Income$Total Expenses$

Ultimately, you want your total income to exceed your total expenses. Sometimes that’s easier said than done! If you find yourself in a deficit, there are steps you can take to better balance your budget.

No matter the format you decide to use, Marine Credit Union has a variety of calculators and other budgeting tools that can help you fill in the details. Our free online calculators can help you:

Determine your monthly expenses. If a question like, “How much am I spending?” keeps you up at night, this calculator can help. Check out our Monthly Spending Calculator.   

Track your cash flow. Analyzing your current spending and savings habits is an important step toward reaching your financial goals. Check out our Household Cash Flow Tracker.

Create a savings or debt payoff plan. It’s important to have savings, but if you have debt, you may be faced with a decision about how to best use your budget. Check out our Debt Payoff vs. Savings Calculator.