Creating a Budget – A Step-By-Step Guide

This step-by-step guide to creating a budget will help you build a budgeting spreadsheet and give you the tools you need to manage it.

Living on a budget doesn’t have to be scary or overly restricting. The purpose of creating a budget is to give you peace of mind and make saving for your goals easier.

*This post was originally published on August 1, 2013 and updated on January 1, 2020.*

Crafting a financial plan for a household takes time. The process is sometimes difficult and tedious. However, if you can handle simple math and stick to a plan, you can be successful. The reward of being financially stable vastly outweighs the few hours spent creating a plan. No matter what the situation, creating a budget can give you peace of mind.

I can’t guarantee that this is the best way to manage your finances. Or that our way is the simplest out there. It just works for us. If it works for you great! If not, modify, create, or find a way that works for you.

This leads me to the disclaimer: “This is not professional advice.” This is just an example of how we’ve decided to organize our finances. (If you are in a bind or need serious help, go see a professional.) I can’t tell you enough how great it is not to have to worry about bills when they come in. And not having to check our bank balance each day.

Creating a Budget Using a Simple Spreadsheet

Most people assume I use some complicated system, or an online system like Mint (and other variants). In fact, most people are always trying to convince me to use an online system that links with your bank accounts to sort out your finances and track spending. Those systems are great but to be honest, we don’t use them. It works for some people, but there is nothing more boring than tracking every time I spend and categorizing every purchase I make.

For simplicity’s sake, and again because I am lazy, I use a spreadsheet. I check our spreadsheet twice a month along with our bank statement when I pay our bills or when we make a big purchase. I only worry about it for an hour or two every two weeks because I have things to do!

Things Needed for Creating a Budget

1. Income
2. Bills
3. A spreadsheet program. Excel, or if you don’t have Excel you can use OpenOffice or GoogleDocs. OpenOffice is free and it works great. I used it all the way through college! (Download it here.)

Since finances can be a large project, I have broken it down into 4 sections.

• 1: Creating a Budget
• 2: Saving Money
• 3: Paying Bills – First 2 Weeks
• 4: Paying Bills – Last 2 Weeks

Today we’ll be talking about creating a budget!

Creating a Budget Using a Spreadsheet

The cornerstone of anyone’s finances is the dreaded budget. And unfortunately, there is a large portion of the population that doesn’t have any budget for their household. I have talked to a lot of people that think creating a budget is difficult or requires some sort of skill in finances. False! If you can add and subtract, you should have no problem creating a budget. It just takes a little time.

The easiest way to learn how to create a budget is by doing one for yourself. We will be creating a budget for a fictional couple, Jane and John, and using their situation to build a basic plan for their household. You can either follow along with the examples or build your own plan using whatever situation you are in. At the end of each section, I will post a screenshot of the worksheet we created in the lesson, just in case you have any questions or get stuck!

Creating a a Budget: Calculate Your Total Income

First, let us look at J&J’s income. John works in sales downtown and brings home $675 after taxes, retirement, and healthcare deductions. He gets paid every other Friday. Jane is an interior designer and blogs part-time. She brings home $700 after taxes, retirement, and healthcare deductions. She gets paid every other Friday as well.

Now that we have some numbers to work with let’s go ahead and create a new spreadsheet in Excel/Open Office/Google Docs. I will be using Excel, but the examples should work the same in the other programs. Let’s start by filling in some cells. To edit a cell just double-click on it and type in the value or text. When you are finished, just click off the cell or press “enter”. Go ahead and add the text to the cells like in the pictures below. 

Add an Income Table to the Spreadsheet

As you can see we have the month in A1. Income, Budgeted, Actual, and Difference in A2-D2. Jane, John, and Total in A3-A5. This is a little hard to read so let’s add some formatting and color. To change the color highlight the cells you want to fill in and then click on the fill button.

Next, let’s add a grid. Same as we added the color. Select the area and click on the border button.

Now we are looking good. If you are going to be creating a budget, it might as well have some style. Now it’s time to add the numbers. Since J&J get paid every two weeks we can assume that they get paid twice a month. So for the month of January Jane will bring in $1400 and John will bring in $1350. We will add those under the “Budgeted” column. And while we are at it, we will change the column format to money. This adds the $ sign and the 2 decimal places next to our numbers. Remember, we want our budget to look good. To change the format to money, highlight the cells and click on the “currency” button.

Next, we need to fill in the budget total. We could manually add $1400 and $1350 and fill it in, but instead, we will use a formula to do it automatically. The formulas should be relatively the same for whatever spreadsheet program you are using. We want our formula to add cells B3 and B4 together. To create our sum formula, double-click cell B5 and type “=sum(B3:B4)” and hit “enter”. The cell should now show $2750!

Add Your Expenses

Now that we have income it’s time to add the expenses.  I break down expenses into two categories “Monthly Expenses” and “Discretionary Expenses”. Monthly Expenses are anything that you receive a monthly bill for like rent (or a mortgage), phone, and utilities. Discretionary expenses are things like gas, entertainment, and grocery, stuff that you need but don’t receive a bill for and can somewhat control. Go ahead and add J&Js Monthly Expenses using the picture below. I inserted a new column by right-clicking on column B because I like to add the date that the bill is due and put them in order. This will help us later when we have to decide what bills to pay and when.

Don’t forget to add the total. The formula for B15 will be “=SUM(C8:C14)”. Next, add discretionary expenses.

Now that we have all our income and expense laid out let’s add them all together by creating a group of cells that consolidate our budget.

To fill in our net category we need to use some more formulas. We want to get the total income from C5 into the cell in C24. To do that all we have to do is type “=C5” into cell C24 and press enter.

Now to get our total expense in C25 we want to add our monthly expenses and discretionary expenses together. To do that we use the formula “=C15+C21” in C25 and press enter.

Now to get the net total we will have total income minus total expenses. Use “=C24-C25” in C26 and press enter.

If you did everything right the net total of the budget should be -$75. That means that we are spending $75 more a month than we are bringing in, which is BAD. When creating a budget, remember this important rule: Don’t budget more than 90% of your income. Now I know not everyone can do that, but it is a good goal that has worked for us. Because sometimes we get sick, cars break down, or we want to save money for other things like couches and a house!

Adjusting Your Expenses for Your Income

J&J need to cut some of its expenses to get in good shape and save some money. J&J also want to buy a house in a couple of years, so they need to save extra money for a down payment. Currently, they make $2,750 a month. If they only want to budget 90% of their income then they need to get their expenses down to $2,475 (90% of $2,750). Additionally, they want to save an additional $150 per month toward a house. So their total expenses need to come to down $2,325 ($2,475-$150) per month.

Time to chop!

• J&J decide that they are going to get the smallest data package for their phones reducing their phone bill to $150.
• J&J are giving up NFL Sunday ticket and cable reducing their cable bill to $50 for just internet.
• J&J decide to eat out less and reduce their fun and entertainment to $150.
• J&J reduce their grocery budget to $300.
• Since J&J go out less their gas budget has decreased to $250

With the changes to the budget, the total left over should be $425! Wasn’t that easy? Yeah right, it is never that easy. Why? Because we like going out, we like buying extra groceries, and sometimes bad things happen. A budget is a model for when everything goes according to plan. Of course, that never happens. That is why I suggest budgeting a maximum of 90%. Because we all splurge, overspend and get sick.

This Budget is Based on Our Actual 2012 Budget

Believe it or not, this budget hits very close to home. This is actually a rough outline of the budget my husband and I followed in 2012. Except we cut even more expenses. We were able to get our grocery bill down to $150 a month….YES, $150 a month! Man, that sucked… We also reduced our entertainment and gas budget as much as we could. It was very hard, but with a lot of discipline, we were able to save around $800-$900 a month. We had to get creative with meals, but we were able to have a down payment for a house within a year!

Creating a budget shouldn’t be a punishment. Budgeting is about getting what you want! It forces us to create priorities and identify what we really want to spend our money on. This leaves me with the last tip of budgeting: “Relax, there is never enough and you always have to make a choice about what you can’t have.”

Do you operate on a budget? How do plan out your budget?

After creating a budget, check out the other 3 lessons for Saving Money, Paying Bills, and Paying Bills Biweekly.