How to Create a Budget From Scratch: 6 Easy Steps

You know that nagging feeling in your gut? The one that says, “I should be better with money,” or “Where does it all go?” That’s your brain asking for a budget.

Budgeting isn’t about restriction… It’s about direction. You can still grab that oatmilk chai from your favorite coffee shop or take that weekend getaway with your best friends. A budget just helps you do it purposefully.

Here’s how to create a budget from scratch in six simple steps:

Step 1: Write down your total monthly income

The first step to learning how to create a budget is to figure out how much money you’re working with each month. You’ll want to use your after-tax income for this—aka what actually lands in your bank account, not what your salary says on paper.  

👉 If you’re a salaried worker, this is a bit easier. Just look at your most recent pay stub and note your monthly take-home pay. If you’re paid biweekly, multiply one paycheck by two. Then add two more—because in two months of the year, you receive a third paycheck the way the biweekly schedule falls. If you’re paid weekly, multiply by four. 

👉 If you’re an hourly worker with a set schedule, do your best to estimate your average monthly income. 

For example: $17/hour × 30 hours/week × 4 weeks = $2,040/month (before taxes). Subtract about 30% for taxes if you don’t have them withheld. This may be higher than you need, but it’s better to overestimate than underestimate.

👉 Freelancers, side hustlers, or tipped workers, estimate your take-home pay by averaging your earnings for the past three to six months. For instance, if you made $5,800 in January, $4,500 in February, and $4,000 in March, your average would be about $4,767/month. When in doubt, lowball it. It’s better to plan for less and end up with more.

Step 2: List your needs, wants, and irregular expenses

Until you see exactly where your money is going, it’s easy to feel like it’s just disappearing. So Step 2 is where learning how to create a budget starts to click. 

OK, here’s how to begin. 

Start by pulling up your last one to three months’ worth of bank and credit card statements. Then sort every expense into one of these buckets.

Needs: The essentials

These are the things you can’t live without—or at least, the things that keep your household running. Think:

• Rent or mortgage, and homeowners association fees
• Groceries
• Utilities (electricity, water, internet)
• Transportation (gas, bus pass, car payment)
• Insurance (health, auto, renters)
• Minimum debt payments
• Child care

These aren’t always fixed amounts (your electric bill changes), but they’re essential. If you wouldn’t feel safe, fed, or functional without it, it goes here.

Wants: The extras

These are the flexible expenses that make life fun, but that you could cut back on if needed. For example:

• Dining out
• Streaming services
• Shopping
• Travel and entertainment
• Gym memberships
• Gifts and hobbies

Your “wants” might include things that bring you genuine joy, and your budget should leave room for that.

When we help clients budget, we start with identifying actual costs in a simplistic but accurate way.  Start by looking at all your bank statements, preferably over a one-year period. Your pay stubs and bank statements should be able to demonstrate your income via deposits. If your bank balances went up, you’re saving. If down, you’re overspending.

This tells you how much you spend, and you can add or subtract one-time extraneous costs or income, such as a wedding, college, or inheritance. It allows you to identify those “wants” that can be adjusted. 

Irregular expenses: The sneaky ones

These are costs that pop up once or twice a year but still need a place in your budget. Think:

• Holiday gifts
• Car registration
• Vet visits
• Back-to-school shopping
• Annual subscriptions
• Annual insurance premiums
• Taxes if you own a home and don’t escrow taxes

Total these up and divide by 12 to set aside a little each month. That way, December doesn’t wreck your progress.

Getting this all down gives you a clear picture of what you’re working with and where you might want to make adjustments.

Be aware of one-time costs like replacing the water heater in your house, painting, or car repairs—they happen each year, just different expenses. 

Step 3: Do the math

Now that you’ve listed your income and spending, it’s time to put the puzzle pieces together. Your goal is to see if the money coming in each month is enough to cover the money going out.

Here’s how to do that. 

Start by writing down your total monthly income (after taxes). Then add up your estimated monthly spending from each category:

• Needs (like rent, groceries, and insurance)
• Wants (like shopping, dining out, and subscriptions)
• Irregular expenses (like holiday gifts or car registration, divided by 12)

Now subtract your total spending from your total income. Ask yourself:

• Are you spending less than you earn?
• Or are your expenses higher than your income?

Here’s a simple example to help:

Let’s say your monthly income is $3,500.

After reviewing your expenses, here’s what you find:

• Needs: $2,400
• Wants: $950
• Irregular expenses: $250

That totals $3,600.

You’re over budget by $100, which might explain why you’ve been dipping into savings or relying on credit cards.

Don’t panic if your numbers don’t add up yet. That’s totally normal when you’re learning how to create a budget from scratch. The point of this step is to notice what’s going on, so you can start making small changes.

👉 If you’re over budget:

• Look for places to cut back in your wants category first.
• See whether any irregular expenses can wait or be reduced.
• Don’t forget to check your subscriptions—there may be some you forgot you were even paying for. It’s good to check these even if you’re under budget, so you are not paying for things you don’t need to be!

👉 If you’re under budget:

• Amazing. You’ve got some breathing room.
• Establish an emergency fund.
• Save some extra money to pay off debt.
• You might also want to give yourself a little “fun money” so budgeting doesn’t feel like a drag.

This is your baseline budget. You can always fine-tune it later, but now you have a clear picture of where you stand.

Review actual expenses to ascertain where your money is going. When people predict, they tend to fall about 30% short. 

Step 4: Choose your budgeting style

Now that your numbers are mapped out, it’s time to decide how you want to manage them moving forward. There’s no perfect budgeting method for everyone. The key is picking a style that feels natural and sustainable for you.

Here are three popular budgeting styles to consider:

The 50/30/20 budget

This method divides your income into three simple buckets:

• 50% for needs (housing, groceries, transportation)
• 30% for wants (travel, entertainment, shopping)
• 20% for savings and debt payoff

If your numbers are already close to this breakdown (or you like a more balanced approach), this could be a great fit.

Learn more about the 50/30/20 rule and check out our 50/30/20 calculator.

Zero-based budgeting

With this method, every single dollar gets a job. You assign your income down to the last penny—whether it’s rent, groceries, or your “treat yourself” fund.

The goal? Your income minus expenses should equal zero. No guessing, no drifting.

Read more about zero-based budgeting.

The 80/20 budget (pay yourself first)

This method keeps it super simple:

• Save 20% of your income right away
• Spend the other 80% however you need to

You’re prioritizing saving upfront—and trusting yourself to live within the rest.

See how the 80/20 method works.

Step 5: Track everything for 30 days

Once you’ve picked your budgeting method, it’s time to see it in action.

For the next month, track every dollar you earn and spend. That’s it. No need to be perfect—just aim to notice where your money goes and how that lines up with the plan you made in Step 3.

You can track your budget using whatever tool feels easiest:

• A spreadsheet (Google Sheets works great)
• A budgeting app like YNAB, Empower, or Goodbudget
• A notes app or physical notebook

The best tool is the one you’ll actually use.

Pro tip: Set a weekly “money check-in” time. This could be every Sunday night, Friday morning, or whenever you’re least likely to be interrupted. Grab a coffee, open your budget, and see how things are going.

Use this time to check:

• Have I overspent in any category?
• Did any surprise expenses pop up?
• Do I need to move things around or cut back for the rest of the month?

This isn’t about catching yourself doing something wrong. It’s about noticing patterns and getting comfortable making small adjustments along the way.

For long-term financial planning, we need to know these values and what will drop off and when, such as a mortgage. You should be careful of car loans because if each of your two cars has a 10-year life, for example, you will always have a five-year car loan, so include it. You also need to add in healthcare if retiring, additional spending, and maybe a reduction in daily living if children no longer live with you. Finally, don’t forget about inflation!

Step 6: Tweak and repeat

Budgets aren’t set in stone. In fact, they shouldn’t be. Life changes, and your budget should flex with it.

After your first 30 days, review how it went:

• Were your spending estimates realistic?
• Did any categories surprise you?
• Did you forget to include anything (like parking fees or pet costs)?

From there, start adjusting. Maybe your grocery budget was too tight. Or maybe you realize you never use your gym membership and could redirect that $100 toward your savings instead.

Here are some common tweaks people make:

• Increasing sinking funds (like saving more monthly for holiday gifts)
• Cutting unused subscriptions
• Adding a “fun money” category so you don’t feel deprived
• Reorganizing categories to match your brain better (for example, lumping all car costs together).

Think of your budget like a GPS. You might miss a turn or reroute sometimes, but as long as you keep checking in, you’ll still get where you’re going.

And if your income shifts—say, you get a raise or pick up extra hours—don’t just spend it automatically. Revisit your budget and make a plan for those extra dollars.

What if my numbers don’t add up?

If your expenses are higher than your income (even after trimming the obvious stuff), you’re not failing. You’re just getting honest information, and that’s a powerful place to start.

Here are a few ways to close the gap:

• Take another look at your wants. Can you cut back on restaurants, streaming services, or impulse purchases—at least temporarily?
• Pause big goals. You don’t need to build an emergency fund, pay off debt, and max out your 401(k) all at once. Focus on the most urgent priority.
• Boost your income. If there’s no more room to cut, consider adding a side gig, freelancing, or asking for more hours at work. Even an extra $100 to $200 a month can take your budget from tight to manageable. 
• See whether you qualify for assistance. Programs like SNAP, utility assistance, or local nonprofits might help cover essentials while you get back on your feet. It’s worth exploring.
• Enlist the help of a financial advisor. We recommend the financial advising services of Money Pickle as a great first step into financial planning.

Learning how to create a budget that works for you is an ongoing process. And just by working through these steps, you’re already ahead of the curve.