How to make a budget, step by step

What is a budget, in plain terms?

A budget is a plan for money you have not spent yet. It answers one question before the month starts: of the money coming in, how much goes to bills, how much to savings, and how much is free to spend on everything else?

It is not a record of the past and it is not a punishment. Tracking what you spent is how you find out whether the plan was realistic; the budget itself is the plan. The first one is always a guess, and that is fine. The second month is better because you have a month of real numbers to correct it with.

You need four things: your take-home pay, a list of your bills, last month's spending, and about an hour.

Step 1: How much do I actually take home each month?

Use net pay, the amount that reaches your bank account after tax, retirement contributions, health insurance and anything else taken out of your paycheck. You cannot spend gross pay.

If you are not paid monthly, convert to a monthly figure so every bill lines up:

If you are paid every two weeks, a safer choice is to budget on two paychecks a month and treat the two extra paychecks in the year as a bonus; the biweekly paycheck guide shows how. If your income changes from month to month, budget on your lowest normal month, not your best one.

Step 2 and 3: What are my bills, and what do I really spend?

Fixed bills are the ones that arrive whether or not you think about them: rent or mortgage, utilities, phone, internet, insurance, transit pass or car payment, subscriptions, and the minimum payment on every debt. Go through last month's bank and card statements and write each one down with its amount.

Yearly and occasional bills are the ones that wreck first budgets: car insurance paid once a year, a membership, a license renewal, holiday gifts. Add up a year of them and divide by 12. A $480 yearly insurance bill and $540 of other yearly costs come to (480 + 540) / 12 = $85 a month, which you set aside every month so the bill is already paid for when it arrives.

Everyday spending is everything else: groceries, eating out, fuel, clothes, household things, fun. Do not guess these. Add up what last month's statements actually show, grouped into five or six categories. Most people underestimate this part by a wide margin; the where did my money go guide shows a quick way to group a month of transactions.

Step 4: What does a finished beginner budget look like?

Here is a complete monthly budget for an example take-home pay of $4,000. Every number is illustrative; yours will differ.

The arithmetic is one line: take-home - fixed bills - savings = money for everyday spending, here $4,000 - $2,035 - $400 = $1,565, which is then split across the everyday lines. If the result is negative, the plan does not work yet: lower the everyday lines first, then savings, and look at the biggest fixed bill at its next renewal.

The buffer matters more than it looks. Something unplanned happens every month: a prescription, a birthday, a parking ticket. Without a buffer, each one breaks the budget; with one, it is already paid for.

Which budgeting method should a beginner use?

The example above is a simple version of a zero-based budget: every dollar of take-home pay has a line. The other popular starting point is the 50/30/20 rule: 50% of take-home to needs, 30% to wants and 20% to savings and extra debt payments.

Either works. Use 50/30/20 as a quick check and zero-based as the plan. In the example, needs (the fixed bills plus groceries) come to $2,035 + $550 = $2,585, or 64.6% of take-home, which is more than half. That is common where rent is high, and it tells you where the pressure is, not that you failed. The 50/30/20 vs zero-based guide compares the two on the same paycheck.

Step 5 and 6: How do I stick to it?

A budget fails quietly, on the 20th, when you find out it ran out on the 14th. Two habits prevent that.

A weekly check. Once a week, add up what you spent in each everyday line and compare it with the plan. Fifteen minutes. If eating out is already at $160 of $200 in week two, you know while there is still time to change it.

A daily number. Divide what is left for everyday spending by the days left in the month, counting today. Say it is the 12th of a 30-day month and you have spent $610 of the $1,565 everyday money. There are 19 days left, today included: ($1,565 - $610) / 19 = $50.26 a day. That is a number you can act on at a till, which a monthly total is not. The safe to spend today guide explains the calculation in full, including bills that are about to land.

At the end of the month, change the plan to match reality. If groceries were $640 three months running, the budget says $640 now, and the difference comes from somewhere else on purpose.

What are the most common beginner mistakes?

• Budgeting gross pay. Tax and deductions are never yours to spend. Start from what lands in the account.
• Forgetting yearly bills. If your bills list was built from one month of statements, every yearly charge is missing. Set aside a twelfth each month.
• Making it too strict. A budget with no fun money lasts about three weeks. A small guilt-free amount keeps the rest of the plan alive.
• No buffer. Without one, the first surprise breaks the plan and it feels pointless to continue.
• Counting transfers as spending. Moving money to savings or paying your own credit card is not new spending. The purchases on the card were the spending.
• Giving up after one bad month. The first month is a measurement. The plan gets accurate by being corrected.

Can Tally set up a budget for me?

Yes. On the Budgets tab, Tally has budget templates, including 50/30/20, Zero-Based and Student Budget. Enter your monthly income and the template scales to it, filling each category with an amount you can then change. Budgets and templates are free.

Spending reaches the budget in a few ways: read-only bank sync in the US (part of Tally Pro), a statement imported as a CSV or PDF file anywhere else, in-store Apple Pay taps logged the moment you pay through the iPhone's Wallet automation, or a purchase you add yourself, including by saying "Log an expense in Tally" to Siri. Each morning Tally turns what is left of the month into one number: what is safe to spend today, with the bills due in the next seven days already set aside.

This guide explains how budgeting works. It is not financial advice.