How to Make a Budget in 8 Simple Steps

Andrew Weber is a senior director of Planning Philosophy, Research and Guidance at Northwestern Mutual.

Most of us know that we should have a budget, but sitting down to work on it can feel like eating broccoli or doing sit-ups. We know it’s good for us, yet it’s hard to find the motivation to be consistent. But effective budgeting is one of the top ways to take control of your finances.

It helps you understand where your money is going and avoid overspending. It should be less about restricting yourself and more about choosing where your money goes. Plus, a budget is a big part of creating a financial plan that will help ensure you’re still saving for future goals like paying down debt, saving toward retirement, or putting money away for your kids’ college.

Whether you’re starting from scratch or adjusting an older budget, this step-by-step guide will show you how to create a budget that works for you.

How to create a monthly budget in 8 steps

The best way to create a budget is to track your income and expenses, choose a simple framework, and adjust it regularly based on your goals. Here’s how:

Step 1: Calculate your net income

To start a budget, calculate how much money you have to work with. Add up what you earn each month after taxes and payroll deductions to find the amount that is actually deposited into your bank account. When estimating how much you’ll pay in taxes, be sure to calculate based on your most recent tax bracket and filing status.

Remember to include secondary income streams

Include not only income from a regular paycheck but also the take-home pay you earn from a side hustle or part-time job, alimony/child support, and fixed investment income. If taxes aren’t automatically deducted from your side job income, then make sure you’re setting aside money for this. For variable month-to-month income, like from freelancing, calculate an average based on the past six to 12 months, and use the lower end of the range.

Step 2: Add up your fixed expenses

These are the bills and expenses that you plan for and pay on a regular basis. They include essential costs like your mortgage or rent, car payment, utilities, cell phone bill, or daycare. This can also include what you spend on food, gas, and clothes each month. These are basically the nonnegotiable expenses that keep your life running.

Step 3: Total your less frequent costs

It’s not uncommon to forget about irregular, nonmonthly payments. Because these types of costs can fall off your radar until right before they’re due, it’s important to account for them in your budget.

Add up what you spend every year on things like quarterly taxes, auto registration fees, annual insurance premiums, school tuition, and travel. What you spend on gifts for holidays, weddings, and birthdays can also fit in this category.

Then take that total and divide by 12: This is how much you should put away each month in a separate savings account or sinking fund so that when those bills roll around, you know you’ve got the cash to pay for them.

Step 4: Determine your contributions to financial goals

This category includes what you’re currently putting toward savings goals, paying down debt, or any other longer-term financial goal. Each month, the payments that you make to these goals will get you closer to financial security. Prioritizing paying down debts can help you start saving for the things that are important to you, like helping fund your child’s education, taking that dream vacation, and retiring comfortably someday.

Step 5: Estimate your discretionary spending

Discretionary spending is money that you can spend on whatever you like that isn’t already a fixed or necessary expense. It’s basically extra money that you can use for things like these:

• Impulse purchases
• Streaming subscriptions
• Gym memberships
• Tickets to concerts, clubs, or movies
• Everyday wellness including haircuts, skincare, and similar expenses
• Hobbies
• Eating out
• Vacations and spa days
• Cleaners, dog walkers, or other people who help at home

If you’re not sure what this total should be, look at how much you’ve spent over the past three months and use that to get a clearer picture. Or pick a month that you’d consider a typical month as far as your discretionary spending goes and use that number.

Step 6: Do some simple math

Take your total monthly take-home pay and subtract your fixed expenses (including nonmonthly costs) and contributions to your financial goals.

What’s left is how much you have available for discretionary spending. If this number is higher than what your actual discretionary spending, then congratulations—you’re living within your means!

But if your actual discretionary spending is higher than the amount left over, it means you’ve got some work to do. You’ll have to figure out which of your expenses are eating up too much of your budget and where you may want to cut costs to make sure you aren’t going into debt to afford your lifestyle.

Even if you aren’t overspending, it’s still worth looking at your expenses to figure out if any could be cut so you have more to contribute toward your financial goals. For instance, maybe you want to up your retirement savings through IRA contributions or maxing out your 401(k). Cutting a rarely used subscription service and diverting that money could be an option. Or maybe your fixed costs take up such a large chunk of your budget that you don’t have any “fun money” left.

Step 7: Develop a monthly tracking system

Creating your budget is an important step, but sticking to it is also key.

To do this, you’ll need to come up with a process to look over your past monthly spending and compare it to what you budgeted. There are helpful apps and websites that can categorize expenses for you (some financial institutions even do this for you). Northwestern Mutual clients can get fast, easy, and secure access to their accounts and track spending with our Cash Flow budgeting tool in our mobile app. Using AI might be an option, but be careful about uploading account information into general AI tools.

Step 8: Continuously update your budget

Crafting the right budget for you means finding a balance between being able to afford your lifestyle now while saving for your future—without feeling like you’re depriving yourself. So don’t be afraid to adjust your figures as your goals shift. After all, your life will change over time, and so should your budget.

Looking at your budget a few times per year is a good habit to get into so you can reassess your spending habits and goals. A midyear financial checkup can also help you track your progress and reach your financial goals.

You’ll also want to revisit your budget when you experience life and career changes—like having a child or getting a new job—to adjust for added expenses or higher income.

Other budgeting tips

Making a budget is personal—there’s no one-size-fits-all approach that you have to follow. But there are some useful starting points.

Use a budgeting strategy

There are many guides out there for how you should use your monthly income. You may have seen the 50/30/20 rule, which suggests you use 50 percent of your money toward needs, 30 percent toward wants, and 20 percent toward saving. Another option is the 70/20/10 rule, which suggests you use 70 percent toward expenses, 20 percent toward savings and investments, and 10 percent toward debt (or donations).

We think the most realistic balance for most people is following the 60/20/20 rule: 60 percent goes toward your fixed expenses, 20 percent toward savings goals, and 20 percent toward discretionary items. If your monthly take home pay is $4,000, that would mean $2,400 going to fixed expenses, $800 to savings, and $800 to discretionary spending.

When budgeting, targeting these general proportions can be a great way to get started. But also keep in mind there’s no one size that fits all, and it’s okay if the percentages don’t match exactly. Your financial advisor can help personalize your budget to fit your situation and goals.

Align what’s important to you with your financial priorities

Saving for retirement, paying down debt, saving for a new car—there are lots of things you may want to do with your money, and you’ll need to rely on your values to prioritize your savings goals. You’ll have to decide how much savings you want to put toward college versus retirement or whether to pay down your mortgage versus save more for retirement. Your financial advisor may be able to help you find the right balance.

If you find it hard to say “no” and stay within your discretionary spending budget, try loud budgeting. It gives you permission to say no to social engagements because you are trying to save money. This will relieve the guilt of saying no and help you stay committed to your budget and save for what really matters.

Another effective strategy is mindful spending, which can make you feel more in control of your finances. This approach involves more intentional spending by avoiding impulse buys but leaving room for well-planned splurges that bring lifetime memories. Just make sure you also spend intentionally on yourself first by contributing to retirement and savings goals. Northwestern Mutual’s 2025 Consumer Sentiment Survey found that 79 percent of Americans are willing to skip small indulgences to save for a more meaningful trip, concert, or luxury item.

Budgeting tips by planning stage

While every person is different, there are steps you can take as your financial life gets more sophisticated. Talk with a financial advisor about these points.

1: Foundational planning

When you get serious about your money, here are some things to think about.

• Consider disability and life insurance to protect your income and loved ones, because without your income you’ll probably need insurance to help pay your bills and save for your future.
• Create an emergency fund to avoid putting unexpected expenses on high-interest credit cards.
• Develop a clear debt‑paydown strategy—and do your best to stick to it.
• Take advantage of the amount your employer will match when you contribute to a retirement savings account like a 401(k).
• Align investments with your appetite for risk and planned retirement age.
• Create basic estate planning documents (like your will).

2: Strategic planning

After you’ve got the basics covered, you can move on to the next level.

• Increase your retirement contributions and diversify across account types.
• Expand your emergency savings to cover six to nine months of expenses.
• Evolve your life insurance strategies as income and responsibilities grow.
• Diversify your investments across different assets like stocks, bonds, cash, and real estate.
• Develop a strategy to pay for long-term care, should you need it later.
• Add umbrella liability coverage for costs beyond the limits of your home, renters, or auto insurance.
• Explore your trust and estate planning options.

3: Optimized retirement planning

Next, optimize your finances to prepare for your transition from working life to retirement.

• Increase your retirement and health savings, including catch‑up opportunities.
• Create a clear strategy to draw your income in retirement.
• Manage your investments using comprehensive asset allocation.
• Establish more guaranteed income sources through annuities.
• Adopt or expand long‑term care insurance to cover your future expenses.
• Review your life insurance strategies for additional legacy, stable assets, and income flexibility.
• Improve your estate strategies and tax efficiency in retirement.

4. Wealth transfer planning

Finally, look beyond retirement to your legacy, including what you’ll leave your loved ones.

• Review and enhance your estate planning strategies.
• Evaluate trust options and gifting techniques.
• Use life insurance to improve your estate outcomes.
• Explore any charitable and legacy planning opportunities.
• Coordinate your tax management strategies.
• Ensure assets will be distributed as you intend.

Budgeting is a key part of your financial plan

Creating a budget isn’t about restricting your spending but making intentional choices with your money.

By understanding your income, tracking your expenses, and aligning your spending with your priorities, you can build a budget that supports both your day-to-day needs and long-term goals.

If you want to create a budget and build a financial plan that works for you, your Northwestern Mutual financial advisor can help you take the next step with confidence. They will ask questions to define what’s important to you and build a plan so you can get what you want. Your advisor will also find opportunities and blind spots to grow and protect your savings as you work toward your goals.

It all starts with a good financial plan. Your monthly budget can then help you keep on track.

Not intended as a recommendation or legal or tax advice. Taxpayers should seek advice regarding their particular circumstances from an independent legal, accounting, or tax adviser. All investments carry risk, including the potential loss of principal invested.

Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP^®, CERTIFIED FINANCIAL PLANNER^®, and CFP^® (with plaque design) in the United States to Certified Financial Planner Board of Standards, Inc., which authorizes individuals who successfully complete the organization’s initial and ongoing certification requirements to use the certification marks.