How to Budget in 2025 – Step-by-Step Guide

Budgeting can help you organize your expenses, save money and meet savings goals, but this is easier said than done. Budgeting can be tricky, and even harder to stick to.

However, once you know how to budget, things get a bit easier over time. This article provides a step-by-step guide to making a budget to help you in this learning process.

Table of Contents Table of Contents

1. Calculate your monthly net income
2. Calculate your monthly expenditure
3. Make a budget plan and set goals
4. Choose a budgeting method
5. Review regularly and adjust if needed
Conclusion
FAQs
References

Table of Contents

1. Calculate your monthly net income
2. Calculate your monthly expenditure
3. Make a budget plan and set goals

Show Full Guide

4. Choose a budgeting method
5. Review regularly and adjust if needed
Conclusion
FAQs
References

1. Calculate your monthly net income

The first thing you need to prepare a personal budget is your monthly net income or take-home pay. Your take-home pay is the amount you can spend or save after taxes or other deductions, such as 401(k) contributions and health insurance premiums.

Be very careful not to use your total pay for your budget, as it may result in overspending. When calculating your take-home pay, you need to include the money you regularly receive, such as social security, disability, pension, child support, regular interest or dividends, and alimony.

2. Calculate your monthly expenditure

Once you have your monthly net income, the next thing you need to determine is how you want to spend that income or what your monthly expenses will be. The best way to do this is to track and categorize your expenses in a typical month.

You can easily track your expenses using the past three to four months’ receipts and credit card statements. You need to take an average amount of the last three to four months to calculate your monthly expenditure.

Once you have determined your monthly expenditures, you can then divide them into budget categories, such as groceries, gifts, and so on. However, try to limit the number of categories as much as possible to ensure your personal budget is simple to understand.

3. Make a budget plan and set goals

You now have the necessary data to make a budget, but before you actually proceed to draft your budget, you need to set your short- and long-term goals. Short-term goals are usually for one to three years, such as saving for an emergency fund or paying a credit card debt, while long-term goals might be saving for retirement or your child’s college education.

These goals will come as line items in your household budget. Always remember that your goals may change over time depending on your financial situation, but identifying them encourages you to stick to your budget.

You can now make your budget plan by listing your take-home income and different categories of income you determined above.

4. Choose a budgeting method

A budgeting method is simply a framework for budgeting. Different people have different approaches to managing money, so it’s important to choose a budgeting method that fits your lifestyle and covers your needs, wants, and saving goals.

Below, we’ve outlined some of the most popular budgeting methods.

50/30/20

Now a staple of personal finance, the 50/30/20 rule was originally pioneered by U.S. Senator Elizabeth Warren in here book All Your Worth: The Ultimate Lifetime Money Plan. Under this system, you must divide your income into three parts – 50% for needs, 30% for wants, and 20% for saving goals.

You can adjust the percentages depending on your financial circumstances. For instance, a household with high debt may want to devote more of their income to needs and savings than wants.

There are also alternative versions of this rule, such as the 80/20 rule (spend 80%, save 20%). However you want to divide it, the core concept remains the same: divide your income into allocations, and stick to them.

Envelope

The envelope method is primarily for people who struggle to control their spending. Under this method, you need to assign an envelope for each category of expenses you determined above.

Now, every month, fill those envelopes with the money you budgeted for each category. Once you have spent all the money in that envelope, you need to stop spending on that category. In simple terms, this method helps you avoid overspending.

The envelope method works well if you are using cash. You can, however, also use the ‘digital envelopes’ that come in a budgeting app or a bank account.

Zero-based budget

As the name suggests, a zero-based budget starts with zero. It assigns each dollar of your take-home pay to an expense, so the total income with fewer expenses is zero.

However, this doesn’t mean that you are broke at the end of the month or you spend everything you earn. Instead, it suggests that you have accounted for each dollar you spent or saved.

Such a budgeting method is more useful for people whose financial situation has recently changed. For instance, if rising inflation has impacted your spending, you can use the zero-based budget to balance the increased cost of living with the same income.

Pay-yourself-first

This is a reverse budgeting method where you first account for your savings goals and then focus on fixed and variable expenses. The method prioritizes savings but doesn’t sacrifice necessary expenses, such as housing, utilities, and insurance.

Such a method is useful for people who want to save more money and are confident that they will cover their necessities. Moreover, it doesn’t require detailed record-keeping.

To prepare a pay-yourself-first budget, you need to set aside a pre-determined amount for savings before paying any bill or purchasing anything. After setting aside money for savings, you must pay for necessities, and the remaining balance goes towards wants.

5. Review regularly and adjust if needed

You now know how to budget, but the work is not finished yet. It is important that you regularly track your budget, including expenses and income, to ensure you are on track to meet your financial objectives.

Your income or expenses may change over time, so it’s important to make adjustments to your budget to maintain its accuracy and effectiveness.

You may also need to adjust your budget if there is a change in your saving goals or investment objectives.

Conclusion

A budget is a personal spending plan that considers your expected income and expenses to help you move closer to financial security. Although the terms ‘budget’, ‘expected income’, and ‘expenses’ may initially scare you, if you follow this step-by-step guide, you can easily engineer an effective, realistic financial plan.

Always remember, that learning how to create a budget is only half the battle. What’s even more important is sticking to it to keep a check on your spending and ensure you are always on the right path to meet your short and long-term financial goals.