by Nicole Dow (Senior Writer)

Updated December 15, 2022

It may be tempting to go around treating yourself every day without ever thinking about how much money is in your bank account.

But let’s face it — you don’t want to be struggling paycheck-to-paycheck, swimming in debt with nothing saved for emergencies. So unless you’ve got a money fountain in your backyard (or a generous trust fund), you need a plan for how you spend your hard-earned cash.

Creating a budget — and sticking to it — could give you the financial freedom you crave. And it doesn’t have to be a grueling process.

How to Budget in 4 Easy Steps

1. Know Your Net Income and Average Expenses
2. Set Your Financial Goals
3. Find Your Favorite Budgeting Method
4. Find the Best Budgeting Tools for You

Gain control of your personal finances by learning how to budget in a way that makes the most sense for your lifestyle. We’ve laid out exactly what you need to do to create your own model budget in four pretty simple steps.

Step 1: Know Your Net Income and Average Expenses

Before you can make your budget work effectively, you need to know your numbers. We typically like to focus on a monthly budget, since most bills are due once a month.

Get started by logging into your checking account online and grabbing your last couple months’ worth of bank statements. While you’re at it, grab your credit card statements, too.

Pro Tip

Exporting your statements to a spreadsheet or using highlighters on printed statements can help you see patterns in your income, spending and savings habits.

How to Figure Your Monthly Income

First, write down your monthly income.

This should be your take-home pay for the month — your monthly after tax income. That’s the money you earn (your gross income) minus deductions for taxes, Medicare, Social Security, health insurance contributions and allocations to retirement accounts like your 401(k).

This part is easy if you have a full-time, salaried job. If you are paid by commission, work hourly or have irregular income (like freelancing), use an average of the last six months to get a rough idea. Self-employed budgeters can benefit by taking a step back each quarter to examine their income.

“When you’re self-employed or have significant freelance income, you’re typically required to make quarterly estimated tax payments,”said Robin Hartill, a Certified Financial Planner and senior editor and writer for The Penny Hoarder. “Having to check in four times a year can be great for your budget.”

Hartill said you can also make more frequent estimated tax payments if that helps you budget your self-employment income better.

“Making payments weekly or biweekly instead of four times a year can make budgeting for taxes a lot more manageable,” she noted.

But don’t just stop there when calculating your monthly income. Add any extra money that comes in from your side hustles, child support payments, recurring bonuses or stipends, financial aid payments — include it all.

How to Figure Your Monthly Expenses

Your next step is the painful part: It’s time to log your monthly expenses to see how much you spend.

Start with your regular fixed expenses, which may include:

• rent or mortgage payment
• utilities
• car payment
• car insurance
• life insurance premiums
• credit card payments
• student loans payments
• other debt repayment
• cell phone bill
• internet
• cable TV
• other monthly subscriptions, like Netflix or Spotify.

Don’t forget to include non-monthly but recurring expenses, such as:

• vehicle registration fees
• credit card fees
• HOA fees
• professional association dues
• annual subscription renewals

To incorporate these non-monthly but regular expenses into your monthly budget, add up the total cost for a year, then divide that number by 12 to find out how much they cost each month.

You can save up for these annual expenses by setting up sinking funds so that you’re prepared to pay the full cost when the bill comes due. You may even want to open a separate bank account for those expenses so you’re not tempted to spend the money.

From here, start adding up your variable expenses. Analyze your spending habits. How much are you spending on necessities and unexpected expenses that aren’t fixed, such as groceries, clothing, and medical bills? What about the amount of money you drop on nonessential expenses like eating out and drinks with friends?

To get a full picture, organize your spending into budget categories. For example, movies, concerts and museum visits can all go under entertainment. Your gym membership, yoga membership and the drop-in rate on a CrossFit class can all go under fitness.

Look at a few months of statements to get an average for this part, too. That will give you a more accurate picture of your finances.

Want to see your big financial picture? Click here to answer a few questions and you’ll receive a customized financial plan — it’s totally free and totally anonymous.