For all of my adult life up until the age of 35, I did not even think about budgeting.

how to set up a budget

Seriously. I thought budgeting was for the destitute.

I also had this perception that budgets were a waste of time because they were too tedious and restrictive. The question of How to Make a Budget never occurred to me.

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I couldn’t have been more wrong. Budgeting set me free in so many ways!

Everyone should budget. Everyone!

Many wealthy people are avid budgeters. Check out this post from of celebrities who budget. 


At age 35, I was getting my tax stuff prepared for the first time as a self-employed HR Consultant and I started digging deep into our finances. I fell down a rabbit hole!

Once I came out of that rabbit hole, I realized I didn’t really like what I saw. I realized I was living in a fantasy world. Spending money we didn’t have. Money we should have been saving.

Since I love Pinterest, this led me to start searching personal finance keywords such as how to make a budget, how I could get a better handle on our finances, etc. Basically, trying to figure out where to start.

I keep having flashbacks to my husband getting mad at me for my spending. Lattes, new clothes, purses, this and that, etc, etc. I brushed him off over and over again. Eventually, he just gave up. I feel so bad that I didn’t take it more seriously. All that money just down the drain.

How to Make a Budget

I knew I had to change my habits first, develop goals and a game plan. I could change my habits but developing goals and a plan didn’t come as easily. But I realized I had to do all three.

It doesn’t help that money is such a taboo subject in our society. We don’t really talk about it. We don’t even learn about basic budgeting in school – probably one of the most important life skills!

The shroud of secrecy is a missed opportunity to share and learn from one another, so I want to open the dialogue to help others who might be in the same situation.

Once I realized we needed to figure out how to make our budget, I read article after article on the subject of learning to budget, how to make a budget plan, etc. I took a lot of the great advice I read and started to put all our income and expenses in an excel spreadsheet. Over time, this spreadsheet has evolved and continues to change to this day. I LOOK at it almost every day!

Budgeting is a skill that needs to be learned and honed. It is a lot of work to get it going but after a while, it becomes second nature and you will wonder how you lived without it. So, if you are a newbie or your budget hasn’t worked for you in the past, keep reading…

I am going to break it down for you in 11 straight forward steps it takes to create and follow your first budget and set some goals.

Keep in mind, this may take you several weeks or even months to work through all these steps. Rome wasn’t built in a day and neither was a solid budget. It takes time.

1. Determine your Money Personality.

The first thing you need to do is determine your money personality. Why you might ask? Your money personality is what drives your spending habits and your overall attitude towards money. Once you have had a good hard look in the “money personality” mirror, you will be more aware of what your strengths, weaknesses, opportunities, and threats are when it comes to your personal finances are. 

I found this quiz on a New Zealand website called $orted. Take this quiz first!

I’m a sound controller. What are you?

2. Know Your Net Worth. 

Your net worth is what you own (assets) minus what you owe (liabilities). 

Assets – Liabilities = Net Worth

Knowing your net worth is CRITICAL in setting financial goals because it makes your financial situation crystal clear at this point in time and gives a benchmark to measure your progress. 

Basically, your net worth gives you a starting point to build on.

Here is an analogy for you. Think of your net worth as a tree in your yard. You plant it, water it until the roots take hold, you prune it and nurture it until it is able to thrive with only routine maintenance. 

Same goes for your net worth: You start by earning money, investing in yourself by buying assets and paying them off, investing in your retirement etc. You are constantly earning, contributing, paying off debt until the point you are happy with your net worth. To the point you can retire comfortably. That’s the goal, right?

Here is how to figure out your net worth: 

a) What is the amount of your total assets?

Write out all your assets such as the following:

  • Investment accounts
  • Retirement savings
  • Liquid assets such as savings accounts, cash, money market funds, treasury bills, etc.
  • Vehicle value
  • Real estate value
  • Personal property such as furnishings, jewelry
  • Business assets or equity

Add them up. 

These are assets that have an actual cash value and could be liquidated if needed, some easier than others. 

Here is an example:

How to make a budget Assets Example

b) What is the amount of your total debt?

Record every debt you have such as:

  • Mortgages
  • Credit cards
  • Line of credits
  • Debts to friends/relatives
  • Student loans
  • Car loans
  • Business loans

Plot them out on paper or in an excel spreadsheet. Include the following information:

  • Total Amount
  • Interest Rate
  • Minimum Monthly Payment
  • Payment Date

Here is an example:

Liabilities example for How to make a budget

 c) Calculate your net worth

Assets – Debt = Net worth

In this example, $610,000 – $272,900 = $337,100.00 

You will use this number to measure your progress each month as you pay down debt, save money, and maybe make more money. 

You might be asking if your Net Worth is on Track?

This is a hard question to answer as this is a very personal question and is unique to each person’s situation (ie, lifestyle, cost of living, etc). There is no known magical number that you should achieve by a certain age. 

However, if your net worth is negative or very low, you know the answer to the above question and you will need to work hard on improving this number as quickly as you can. But don’t fret too much. At least you know now and can start making plans to improve your net worth. 

If you think you are doing well but aren’t sure, some people find the below calculation to be helpful that I found on Investopedia:

Net Worth = [Your Age – 25] X [Gross Annual Income ÷ 5]

This formula shouldn’t be taken as gospel. Instead, use it as a guide. 

Also, don’t be alarmed with small fluctuations in your net worth. If you buy a new vehicle and finance it, your net worth is likely going to decrease temporarily while you pay it off. 

3. Create your budget; Step-by-Step.

a) Determine your re-occurring monthly expenses. 

The first thing you will need to do is go through all your bank and credit card statements for the last two to three months and record all your expenses that happen every month. Either on paper or in Excel. 

Also, record the day of the month bills and payments are due. 

Organize them in the order they are due. This is really important because you need to know when you have money being withdrawn from your account or when you need to make a payment, so you don’t incur overdraft fees. You don’t want to use your overdraft as the interest rate tends to be quite high. If you don’t have an overdraft set up, you will incur “Non-Sufficient Fund (NSF) charges.

If you are having trouble with some of your due dates, call the provider and ask for them to be changed. An example is when your mortgage comes out the day before you get paid. 

Here is an example. 

Reoccurring month expenses, how to make a budget

For a total of $6,311.80.

This is your baseline starting budget.

A word on FOOD! I don’t know about you but this is the budget line item that we mess up on the most! It takes quite a lot of focus to keep our food expenses in line. This is why I created a post all about reducing and controlling your grocery budget called 17 Easy Tips To Eat Healthy on a Tight Budget.

Also, to go along with my post 17 Easy Tips To Eat Healthy on a Tight Budget, you may also want to read my post on Meal Planning for Beginners. Even though it’s for beginners, it is very comprehensive.

You have done a lot of work so far. Keep going!

b) Determine your Monthly Irregular Expense Amount*

These are expenses that don’t happen each month, but they do happen every so often or annually. 

Make sure to err on the side of caution and add in a little where you think the cost of something will go up. 

Go through your bank and credit card statements again and look for expenses that are irregular such as oil changes, haircuts, birthdays, school fees, etc but you know they will happen again. Try to estimate the month that these expenses will be paid. 

Each month, revisit this worksheet and update it with what you actually spent. This will help you year over year to budget for these irregular expenses. 

Here is an example:

Budget process for irregular or infrequent monthly expenses
How to budget for irregular expenses each month

c) Add your Monthly Irregular Expense to your monthly budget*

Once you have plotted out your Irregular Monthly Expenses like in the example in b), add the “Monthly Total” to your monthly budget. 

This is great for three BIG reasons:

  1. You can plan well in advance if you are coming up to a heavy month.
  2. It gives you a more accurate picture of your spending when you add it to your monthly Re-occurring expenses.
  3. You won’t forget about them. Because they aren’t regular expenses, they are very easy to forget about.

Now, calculate the average of the 12 months of Irregular expenses. You will use this number in the next step. 

d) Calculate your Monthly Net Income.

  1. Add up all of your after-tax income. 
  2. If you are self-employed, use the lowest monthly amount you have earned in the last 12 months. In this example, it should be more than $6,311.80.
  3. Now, subtract your monthly budget amount (i.e., $6,311.80) from your Monthly Net Income. For the Monthly Irregular Expenses line item, use the average you calculated above at the end of step c). This will tell you if you are making enough money to support your lifestyle. 


  • If you have a positive number, congratulations, you are doing so good! Could you do better? 
  • If this number is negative, you are living beyond your means. You will need to make changes. 

e) Reduce Your Spending

I am not a big believer in making drastic changes quickly. Most people can’t do this because it becomes frustrating and stressful to maintain and feels too depriving. 

Instead, tackle one expense at a time.  Look for easy wins.

Revise Your Monthly Budget.

Now that you have cut the fat from your expenses, you can go back and revise your monthly budget.

Here is an example:

Revised budget

As you can see in this example expenses were cut by $519.90 per month ($6311.80 – $5791.90) by going through and evaluating every line. That’s $6,238.80 per year!

Does this put you in a situation where your monthly net income is greater than your monthly expenses? 

If yes, go to the next step. 

If no, you need to go back and make some deeper cuts. If you do that and you are still living beyond your means, you may need to look at moving to a less expensive home, cut out all investment contributions temporarily, sell a vehicle, etc. These are not easy decisions.

Your other option is to make more money. 

We don’t get into this here but you can read my post called 23 Flexible & Easy Ways to Make Extra Money for ideas.

4.Goal Setting.  

Now that you have a handle on your expenses, it’s time to set goals based on your situation. 

Just like any goal, your money goals should be S.M.A.R.T. 

This stands for:

  • Specific
  • Measurable
  • Achievable
  • Realistic
  • Timely

Here are a few must-have goals that you need to check off the list before moving onto the fun stuff.

5. Start an Emergency Savings Account.

Things happen, expenses we didn’t anticipate come up whether it’s replacing a hot water tank, repairs to your vehicle, assisting a loved one in a time of financial need, etc. My point is you just never know what tomorrow will bring.

But, what you can do is be prepared for it. 

You will notice this step comes before paying off debt. This isn’t a typo. 

You need to have a small emergency fund before you pay off your debt so that you don’t go into further debt if an emergency comes up that requires a big expense. 

Start with $1000 to $2000.

Don’t forget to go back and add this to your budget. 

For instance, in this example the budget was cut by $519 dollars. This should be your emergency savings amount each month.

Also, I recommend that you keep this money in a high interest savings account. In Canada, I use Tangerine. In the U.S. CIT is very popular. 

6. Get Rid of Debt Fast.

If you are in debt, that should be priority numero uno to get that paid off as quickly as possible.

Ok, so we aren’t talking about your mortgage at this point. Instead, we are talking about loans, credit cards, etc. 

Debt is the plague of the 21stcentury!

Change your mindset towards debt. 

Repeat to yourself: Debt is bad! Debt is evil! 

Here’s how.

Use Dave Ramsey’s debt snowball method.  It is so simple and so effective. All you do is list your debts and start to pay down the smallest one first and then go the next smallest, and so on. While you are doing this, pay the minimum on the others. It is so effective because most people get a win fairly quickly and it gives them the motivation to keep going.

7. Finish your Emergency Savings Account.

Save 3-6 Months of Expenses.

So, you know when you created your budget and came up with a monthly budget? Take this number and multiply your monthly budget by 3 to 6 times for the number of months of expenses you think you should save up.

In the example below, if I decided I needed to save up 3 months this would be:

$5791.90 x 3 = $17,375.70.

This may seem like a lot because it is! However, if you apply your budget and put all your extra money towards this endeavor, you will do it. If you have to cut further from your budget for a while or find ways to make extra money, then so be it. This will protect you if something catastrophic happened and you need some cash fast.

Think about how much better you will sleep at night when you have this money saved!

8. Regularly Review your Budget.

Your budget is not static.

It will not stay the same for years or even months because, well, life changes. Look at it very regularly at least in the beginning. Preferably at least weekly. Once you get the hang of it, you can go a little longer because you will just know it.


You have done a lot of work so far! Do you have some big goals set? 

If you feel like you have already set some big goals that are going to take some time, conquer them before moving onto other goals. 

If you have conquered the goals above, it is time to look at your:

9. Retirement Considerations.

I put retirement ahead of children’s education savings because your retirement fund is more important than your children having their education paid for. 

Retirement money is a necessity, paying for your child’s education is not.

If you need more convincing, look at it this way. If you prioritize your Children’s education before your own retirement and end up coming up short on your retirement savings, your children will be left with the burden of subsidizing your living expenses.

If you aren’t already making contributions to your retirement, look at what you can reasonably afford. Once you have paid off any consumer debt and have 3 to 6 months of expenses saved, start or beef up your retirement savings. Many experts say you should always be putting 15% of your pre-tax income away for retirement.

How much should you have saved?

You might be wondering how much you should have saved by your age for your retirement.

There is no hard and fast rule here as life can be unpredictable and everyone’s situation, location, lifestyle, etc is different. But, there are a few basic calculations to give you an idea.

The 80% Rule:

The 80% rule states that you will need 80% of your pre-retirement income to live comfortably. 

If a person’s final salary before retiring is $100,000/yr, they will need $80,000/yr in retirement. You can also factor in other sources of income into retirement savings such as pensions. 

The 4% Rule:

The 4% rule calculates how much of a nest egg you will need at retirement.

Take your desired annual retirement income and divide it by 4%. 

So, if you will need $80,000/yr in retirement, divide that by 4%. This equals $2 million. 

Retirement Savings by Age.

According to Fidelity, we should have the following total retirement savings by each milestone age.

Retirement Savings by Age Guidelines, How to make a budget.

If you are nowhere near what you should have saved for retirement, don’t freak out! 

Remember you are not putting 100% of this amount into your retirement investments. This money is working hard making more money. 

The important thing here is that you have a ball park of where you should be at, have your money properly invested, and are able to stick out the lows of the stock market.

10. Children’s Education

If you have children, estimate what you will need to send your children to college. 

Here is a good online calculator to estimate how much you will need and how much you will need to save each month.

Look into opening an American 529 account or an RRSP (Canada) account. 

11. Don’t forget to live.

With all this budgeting and frugality talk, don’t forget you only have one life so live it! Are you conservative and/or don’t do much traveling but would rather just take a camping trip to your favorite campground? Or do you want to take swanky trips to Paris each year?

My point is you need to have gone through all the steps above and determine what you can currently afford once you figure out how to make a budget.

Do you need to make some short-term sacrifices until you are on track?

Everyone needs to have fun but there are ways to do it frugally and to plan it out with some intention behind it.

You Made it!

Congratulations! You have done a lot of work. Remember to keep reviewing and revising. Set goals and crush them!

Can you do me a favour?

Can you please comment and let me know how this post has helped you?

I sincerely hope you found this post to be helpful and I deeply appreciate you reading it.

If you like this post, I would greatly appreciate it if you shared it!