Budgeting for Beginners—How to Create a Budget

Create a budget in 14 steps with a free budget template.
Seth Kniep
May 27, 2022
Spending without a budget is like driving blindfolded.

But budgeting isn’t just playing defense. In fact, a strong budget is key to getting out of debt, saving money for future endeavors (and emergencies), and understanding what you truly can afford. 

My goal today is not just to teach you how to balance your finances but to also put you in a position to thrive.

Budgeting is fairly simple: 

You track the money coming in, the money going out, and invest any difference. In doing that, you end up with a net zero. You’ll know every single dollar is accounted for and where to find it. 

Today, I’m going to show you 14 simple steps to creating a budget. Plus, I will give you a free budget template.

I have fallen on tough financial times and came back from being $24,000 in credit card debt. With the help of careful planning and budgeting, along with learning how to grow my income, I overcame this debt to start and grow multiple businesses. Let me show you how budgeting can work for you, too. 

Step 1. Get Your Free Budget Spreadsheet Calculator.

Just One Dime has created a spreadsheet template which will automatically calculate how much you should be spending within different expense categories based on your income. 

It can help you identify any overspending so you can curb it and show you where you can afford to spend more. 

To get this sheet, 

1. Visit JOD.com/budgeting.

Just One Dime's Personal Monthly Budget Template

2. Enter your name and an email address. We will send you a link to the spreadsheet at that address.

Enter Your Name & Email Address

3. Open the email and click on the included link. This will take you to our spreadsheet in Google Sheets. Google Sheets is essentially a free version of Microsoft Excel or Apple Numbers. 

Monthly Budget Template in Google Sheets

4. Make a copy (as a Google Sheet) or download your own copy of the spreadsheet (as a Microsoft Excel document) to your computer so you can edit it.

Make a Copy of Google Sheets

The best thing about this sheet is it comes pre-formatted to tell you how balanced your budget is! 

Step 2. Calculate Your Income After Taxes.

The first real step to building your budget is to input your income. You should include the amount of money you make each month after taxes. Afterall, you don’t want to budget for money you don’t actually have after Uncle Sam takes his cut. 

Once you input your monthly income, you know exactly how much money is available to spend. You should always intake at least as much as you spend, otherwise you could have a big problem. 

Take An Average Of Your Paychecks.

This is straightforward if you’re a salaried employee. If you are paid twice a month, add those two paychecks together. If you’re paid four times per month, add those four paychecks together. 

If you’re an hourly employee, however, don’t fall into the trap of estimating your annual wage by multiplying your hourly rate times 40 hours per week (or however much you work) times 52 weeks in a year. That shortcut is most likely inaccurate. 

Instead, go into your bank account and collect statements from as far back as you can. Then, calculate your average monthly income from your actual paychecks. 

For example, let’s say you made the following amounts paid out on a biweekly schedule:

  • $1,100 January 15
  • $1,000 January 31
  • $1,080 February 15
  • $980 February 28

When we add those amounts together, we get a total of $4,160.

Divide that total by the number of months those paychecks represent. In this case, we would divide $4,160 by two months to get an average monthly income of $2,080.

If you don’t already have taxes automatically deducted from your paychecks (which we recommend), then you need to subtract taxes from your monthly average. 

Enter Your Income Into The Budget Calculator.

On the left hand side of the spreadsheet, enter up to three different income sources. 

Add Your Income to Your Budget

For example, if you’re married or live with a partner and have two incomes, input them both. 

The idea is that this budget works for your entire household. In this case, we would enter our monthly average income of $2,080.

Household Income

Once you’ve entered all of your incomes, the spreadsheet will automatically calculate your total household income.

Let Your Free Budget Template Automatically Calculate Recommended Expense Guardrails.

Notice that once your income is entered, the sheet also automatically calculates your recommended monthly spending plus your peak spending threshold

Your recommended monthly spending is the baseline that you should aim to spend on necessary expenses. 

If you add up every recommended expense in that column it will equal 87% of your total monthly income. 

These numbers represent (based on your income) the most conservative recommendation from economists for spending in that category. In other words, if you fall below the recommended spending amount, you may want to spend more in a category to improve your quality of life.

If not, you can save that money!

Recommended Spending Amount: 87% of Total Income

Peak spending threshold is the most you can spend in one month without exceeding the maximum spending limit that any economist would recommend. 

If you add up all the amounts in that column it will equal 145% of your monthly household income. Put another way, if you exclusively spend at your peak spending threshold, you will spend 45% more than you make each month. 

Peak Spending Threshold: 145% of Total Income

That’s the absolute highest you should spend on any necessary expenses. If you ever go over that 145% mark, the Total % of income expected column turns red. This warns you you’re exceeding your absolute max. And if you do, there’s a bigger issue with your budget and finances. 

Exceeding Peak Spending Threshold

Whenever you find a gap in your budget—if you fall closer to, or under that 87% mark—don’t feel obligated to find a way to spend that money. All of our spending recommendations are just that: Recommendations. 

And if you find that you spend less than the recommended amount in a certain category, do a happy dance, pat yourself on the back, and put that money into savings, investments, or something else that will grow your future wealth.

Recommended V Peak Threshold Spending

How You Will Enter Your Expenses

As we go through each category, you will enter the actual costs for each expense type for your entire household. For example, pet food should be included in the food budget. Kids’ clothing should be included in the clothing budget, and so on. 

You will notice there are three separate columns for your expenses:

  • Necessary Expenses
  • Optional Expenses
  • One-time Expenses

Necessary Expenses are, you guessed it, necessary. These are expenses that are unavoidable or non-changing. For example, your rent is a necessary expense: You need it to live and it doesn't vary month to month.

Optional Expenses are where you can make cuts if you are over budget. These expenses are either nonessential or they are essential, but they vary each month. And that variance is where you can potentially cut back. For example, you need food to survive, yes. But the amount you spend on food probably changes each month. And if you had to make cuts, you could grocery shop more frugally to save. 

One-time Expenses happen once a month, one a year, or maybe once in a blue moon. This might be the cost of a new air conditioner if yours goes out in the middle of the summer. This might also be an unforeseen car expense (we’ve all been there). Even if they don’t occur that often, ensure that you are accounting for some one-time expenses so that when something unexpected hits, it doesn’t completely break the bank. 

Just One Dime's Budgeting System

To get your average monthly expenses, go back into your bank account and/or credit card statement history as far as you can. Then, calculate the monthly average you have historically spent on each category. 

If you pay in cash, you’ll need a system to track where each dime goes.

Once you’ve entered your actual monthly expenses, you will be able to tell where you fall within that 87%-145% range and if you have money left over…or if you’re in a hole. 

Step 3. Calculate Your Housing Costs. 

The recommended spending amount is 25%. The peak spending threshold is 35%.

Your monthly rent or mortgage payment goes in Necessary Expenses. Let’s say we have a roommate, and our rent is $600. 

Necessary Housing Expenses

You should also consider other housing costs beyond rent or mortgage. 

For example, you might add pest control or air conditioning filters to the Optional Expenses column. Maybe these cost $12 per month.

Optional Housing Expenses

These costs are worthwhile, however they’re not completely necessary. You could cut these expenses if you’re in a financial pickle. 

And don’t forget about potential One-time Expenses. For example, if you purchase a lawnmower or stain your fence, those are one time costs. 

Common Housing Expenses

Step 4. Calculate Your Food Costs.

The recommended spending amount is 10%. The peak spending threshold is 15%.

Essentially, the cost to feed everyone (including pets) in your household should cost less than 15% of your monthly income; 10% is ideal.

Your food costs are most likely recurring costs. Unless you have a medical condition that requires a specific diet, you likely won’t have any fixed, necessary food costs. Total this expense in the Optional Spending column. For example, let’s say it costs $300 to feed our entire household for one month.

Food Spending

If necessary, you can find ways to cut back on monthly food expenses. You can shop sales, use coupons, and/or stop eating out, for example. 

Common Food Expenses

Step 5. Calculate Your Transportation Costs.

The recommended spending amount is 10%. The peak spending threshold is 20%. 

If you have a monthly car payment, add that to Necessary Expenses. For example, we could add a $200 car payment.

Necessary Transportation Costs

However, that’s likely not your only transportation cost. If you have a car, it needs gas. It needs regular maintenance like oil changes, new windshield wipers, tires, etc. All of those expenses go in Optional Spending

And if you ever decide to have a one time, special fix or upgrade done to your vehicle, for instance maybe you purchase a remote start for your car, those would go in One-time Expenses

Note that transportation doesn’t just include cars. If you have a bus or metro pass, or use any other type of transportation regularly, make sure that is included.

Common Transportation Expenses

Step 6. Calculate Your Insurance Costs.

The recommended spending amount is 10%. The peak spending threshold is 20%.

Rather than including your home insurance with Housing and your car insurance with Transportation, we’ve added a separate column just for them and any other type of insurance you might have. 

This can include life, health, and dental insurance, even pet insurance 🐶. Whatever it is, if it’s insurance, it belongs in Necessary Expenses. Let’s add $300 per month for all insurance costs.

Necessary Insurance Expenses

Keep in mind that if you’re over budget, you might need to shop around to find insurance that fits within your budget. 

Common Insurance Expenses

Step 7. Calculate Your Utilities Cost.

The recommended spending amount is 5%. The peak spending threshold is 10%.

Utilities expenses often change week to week. That said, you should include your average monthly utilities payments in Necessary Expenses

Ensure you include everything: electricity, gas, water, trash, and internet. This all might cost $150 per month, for example.

Necessary Utilities Expenses

Unlike some other expenses, such as clothing, utilities are less flexible. However, if you’re over budget, you can cut down on these costs by saving in small amounts.

Common Utilities Expenses

Step 8. Calculate Your Clothing Cost.

The recommended spending amount is 2%. The peak spending threshold is 5%.

This expense is one that some people will have a lot of, and some will have next to none of. It just depends on how often you and your family need and/or shop for clothes. For example we could say we spend $100 per month on clothes, and add a one-time, yearly expense for shoes of $60.

Optional & One-Time Clothing Expenses

If you find that you’re over the 5% range, you can at least now be more cognizant of your shopping habits. 

As you move forward with your budget, think of this 2%-5% as an allowance for clothing. However, this is, by no means, a suggestion that you must spend the entire amount. 

Common Clothing Expenses

Step 9. Calculate Your Recreation Expenditures.

The recommended spending amount is 5%. The peak spending threshold is 10%.

Don’t worry, no one is taking your fun away!

Recreational expenditures are purchases that allow you to enjoy yourself such as movies, TV or streaming subscriptions, games, concerts, theme parks…whatever you can imagine for fun activities. 

For example, if we spend $200 per month on these activities, we would add that to Optional Expenses.

Optional Recreation Expenses

Much like clothing, think of recreational expenses as a monthly allowance, one you do not have to spend entirely. 

Recreational expenses are easy to overdo, so make sure you’re on track. And if you’re not, try to be more cautious moving forward. 

Common Recreational Expenses

Step 10. Calculate Your Personal Miscellaneous Expenses.

The recommended spending amount is 5%. The peak spending threshold is 10%.

Whatever expenses that don’t belong in the other categories—and also aren’t allocated for savings and/or investments—go here. 

For example, you might add expenses such as haircuts, toiletries, etc. Any random cost associated with living qualifies as miscellaneous. 

Common Miscellaneous Expenses

Add these costs to Optional Expenses and One-time Expenses as appropriate. For example, we might include $110 of miscellaneous, recurring expenses.

Optional Miscellaneous Expenses

Step 11. Calculate Your Short-Term Savings.

The recommended spending amount is 5% or more. The peak spending threshold is 10%.

Optional Expenses: Short-Term Savings/Debt

Notice we’ve separated short-term from long-term savings.

Short term savings is any money that can be accessed easily. It could be stashed away in a bank account or in easily-liquidated investments. 

We recommend you keep six months worth of income in savings that can be converted into cash at a moment’s notice. That way, when a rainy day strikes, you can be financially prepared without having to worry about being evicted, losing power, etc. 

For example, if our monthly income is $2,080, we should aim to have six times that, $12,480, in accessible cash. 

After you’ve secured that six months income mark, you can be more aggressive with other saved funds. You can even move your money into riskier investments with higher potential returns. 

If you, as so many do, have debt to pay off, siphon off part—not all—of this budget towards repaying and eliminating that debt. 

Step 12. Calculate Your Long-Term Savings.

The recommended spending amount is 10% or more.

Optional Expenses: Long-Term Savings

Long-term savings is any investments or savings that you cannot liquidate within a couple of days. 

If you can, stash at least 10% of your income towards investments and savings like this. And, if you have dreams to start your own business, the startup cash to fund that should also go here. 

Recommended V Peak Threshold Spending by Category

Step 13. Decide How You Want To Spend The Difference On Your Income Vs Your Costs.

Once you’ve put together your entire budget, you may:

  1. Get a clear idea of where you’re overspending and how you can make cuts to fall in budget.
  2. Get an overview of any excess income that’s not currently being allocated to necessary expenses.

If you fall into option one—as we are with our example budget—it’s time to cut back on unnecessary expenses. 

Negative Balance Left Over

Check out this article to learn how to cut costs so you can redirect more money towards savings. 

However, if you fall into option two, you then have two more options. You might choose to:

  1. Aggressively grow your wealth. If so, direct this excess towards your long-term investments. 
  2. Donate or spend this excess on fun.

That said, if you do have excess income, the more money you put to work for you now, the more you will be able to donate in your future. And, the more fun money you’ll have for your future. 

The choice is yours…

Step 14. Keep To Your Budget.

Congratulations, you’ve successfully built out your budget!

Now that you have a budget, a framework for directing your income, and an actionable plan to save money and/or attack debt, you must follow it. 

No budgeting system is worth anything if you do not stick to it. 

You must keep yourself accountable. You should check on your bank statements regularly to ensure you’re still on track. Or, you might instead choose one of these resources to hold yourself accountable:

All of these options are apps that automate the process of tracking your spending for you. 

If you want to increase your income, if you’re dead set on changing your future, visit JOD.com/freedom. Our staff will consult with you, understand your goals, and show you how we can help you break the death-by-paycheck cycle so that you can create margin to do the things you love with the people you love. 

Don’t forget to get your free budgeting spreadsheet calculator below if you haven’t already.

What part of budgeting do you struggle with most? Let me know in the comments.

Free Personal

Monthly Budget


Take control of your finances!

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Seth Kniep

Married a pearl. Fathered 4 miracles. Fired his boss. Turned a single dime into $104,857. Today, a self-made millionaire, Seth and his team of 8 badass coaches teach entrepreneurs how to build passive income on Amazon.

Dead serious about building income on Amazon with eight successful coaches in a community of badass Amazon sellers? Join the Amazon FBA Mastery membership.

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