how to make a budget in 10 steps

Written by Glen James

Host of the money money money (formerly my millennial money) & Retire Right podcasts & author of The Quick-Start Guide to Investing.

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How do you actually make a budget? Here's how.

Sitting down to make a budget can feel overwhelming but we’re going to break it down so it’s simple, straightforward and honestly, life-changing. Knowing where your money is at is crucial to getting it sorted and having a framework to move forward is the most freeing thing ever! If you need a framework to run your money through, then check out the Glen James Spending Plan to see if it’s an option that will suit your needs.

Otherwise, let’s dive into how to make a budget!

step 1: tally up your income and expenses

First up we need to get a clear picture of your income and expenses.

Grab a pen and paper and on the left hand side write down your weekly/fortnightly/monthly income (whichever suits your situation).

On the right hand side write the word ‘Expenses’, and underneath that brain dump every expense you can think of and the associated cost. Run through your bank statements if you need to, to ensure you don’t miss anything. Tally it up to gain a total expense amount.

What’s the difference between your income and expenses amounts? Do these figures align, are you covering costs, or are your overspending?

Ask yourself these questions about what’s in front of you:

• Am I spending less than I earn?

• Where am I overspending?

• Do I need to make trade offs with any expenses to cut down on costs?

• Are there any expenses I can cut altogether?

• Do any expenses relate to lifestyle creep?

• Where could you be more efficient with your money?

Doing this assessment will give you a strong sense of your baseline needs, your more luxury spends, and potentially give you an insight into your spending habits. Are you a spender or saver, or somewhere in between?

step 2: cover your essentials first

Now that we’ve got all income and expenses on the table, highlight or underline your core expenses - namely your housing, transportation, basic bills and groceries. These 4 line items are the main focus first.

If you aren’t covering these comfortably then we need to address it — can you increase your income, or find a cheaper alternative of that line item?

Now’s a great time to ensure you’re getting the best deal on these core expenses:

• Can you reduce the cost of housing? The general guideline Glen James suggests is spending no more than 30% of your net take home pay, although this can be difficult with the insane property prices in Australia. See how much of your pay your housing expenses are chewing up and see what can be done to adjust it — try to aim as low as you can get it.

• Consider all transport options! Public transport, biking, walking, sharing — do whatever you can to cut back on travel costs.

• Basic bills — call every provider possible and see whether there’s any chance of a better deal. If they can’t offer you anything, find a new provider.

• Groceries — trial using Click & Collect to prevent from having to go in store, this cuts back on unnecessary spends. Buy items that are in season so they’re cheaper. Try to buy in bulk so you can get better value per kg and split those bigger packs across your meals for each week.

step 3: trim the fat in your expenses (aside from your core expenses)

Now take a look at the expenses outside of your core expenses — which ones can you cut completely, and where can you simplify the luxuries? Things like online shopping, streaming services, gym memberships — these items creep into our spending one by one, and ultimately can be eating a bunch of our cash flow without realising it!

Let’s get lean and stick to essentials for a little while. Especially if you have consumer debt!

This step might be a challenge, that’s ok. We’re asking you to cut back. It’s common for many people to start reviewing their expenses and start justifying why those expenses need to stay. But, dear friend, if you really want to get your budget sorted you need to take this opportunity to cut back to basics and rebuild your budget from there. In time you can come back to these costs when your cash flow is improved, debt is gone and you have income enough to support these fun things!

step 4: check in on your consumer debt

In your expenses list were there any consumer debt items? We’re talking about car loan repayments, credit card repayments, personal loan repayments or buy-now-pay-later repayments? Ideally we want these paid off and get them out of your budget. Set repayments to a minimum for now and we’ll swing back around to kick them to the curb.

Consumer debt has a nasty way of lingering around. So many members of the money money money community have taken much longer than planned to pay off even the smallest personal loan, because a) there’s interest lumped on top of the amount you borrow and b) the issue is actually the spending behaviour. Without changing this, these debts won’t go away. We want to get to the core of your spending habit so you don’t need to use consumer debt.

In an ideal world you pay for everything with money you actually have. Annoyingly these repayments also choke up your cash flow each week so let’s free up some cash. Make an agreement to never use consumer debt again - it’s all about saving up cash now.

step 5: build an emergency fund

Before we get heavily into structuring your budget we need to protect your incoming money system. Time to build an emergency fund so things don’t come toppling down the minute your car breaks down and you have to fork out $5k from your everyday money!

We want to build a simple $1k-$2k emergency fund as a starting point. We’ll fatten this up soon but start here to get a little bit of protection in place so you’re always prepared. Emergency funds are great when they’re set up away from your everyday spending so maybe open an account elsewhere so you aren’t tempted to spend it.

Give yourself a pat on the back once you’ve set up this starter emergency fund — now if your car breaks down, you crack a tooth or the dog needs urgent vet care, you have money ready to go. Remember: emergencies are any costs that cannot be budgeted for with regular cash flow. For example, your car registration is NOT an emergency (although it can feel like that), because that’s a KNOWN expense that comes around every year — you have the ability to put even $30 a week into an account in preparation for that every year. It’s also not a fund for fun activities like music festivals that you decide to get tickets for at the last minute. No, no, no. An emergency example is something like your fridge suddenly stops working and you need a replacement.

step 6: initiate the debt snowball if you have lingering consumer debt

Now we kick your consumer debt to the curb for good using the debt snowball.

1. List your debts from biggest to smallest.

2. Keep the minimum repayments on each debt going.

3. Add a little extra repayment onto the smallest debt until that is paid off.

4. Once that’s done, direct all the money you were directing at your smallest debt, to the next smallest debt on your list until that is paid off.

5. Continue this trend until all debts are gone. Until these are paid off this is your sole reason for living! Once these are done cancel the accounts and cut up the cards - you’re never going back again!

If you need help with this process check out Glen James’s ‘get out of debt’ module in the Glen James Spending Plan!

step 7: thicken up your emergency fund

Debt is gone - beautiful. Let’s build more into your emergency fund so there’s nothing to stress about when a tree falls on your roof or Fluffy breaks their leg (poor Fluffy). Aim to build up 3-6 months worth of expenses in your emergency fund, but like always the more you have saved in your emergency fund, the better.

step 8: assess Glen James’s sound financial house

As a former financial adviser Glen James worked with clients hoping to build up wealth for their future, whilst enjoying the lifestyle they wanted. To help them make these plans and achieve these goals, he often used the picture of a house to explain how they could set things up. This has become his sound financial house (see image).

This diagram shows you the order of things you want to set up financially in your life. Don’t stress if you haven’t done it completely in order - there’s time to tweak and line things up as necessary.

Take a look at it to gain an understanding of what items come first, and how you build up from there.

The foundations at the bottom of the image are where you start — building a spending plan, getting cashed up and debt free, building a protection plan, and getting your wills and estate plan sorted. From there you move upward to ensuring your superannuation is a focus, and your career is building, enabling you to increase your income.

Moving further up the graph you can then focus on the more lifestyle factors like having kids, schooling, pets, buying a home, education for kids, work/life balance, travel, upgrading cars etc. And at the top of the image are your investments - things like investing in shares, investment properties and other complex investments.

This image has helped countless members of the ‘this is money’ community understand what areas to focus on first, and how to build your financial life in a way that keeps your financial goals aligned, supported and working.

step 9: write down your goals - short and long term

It’s time to think about what you want in life! What are your short and long term goals? Write down your goals on a piece of paper (as statistically you are more likely to achieve them when you do this - it’s been studied!). Throw down all ideas that sound appealing to you, and mark whether they’re short or long term. Think through what steps are needed to achieve them, and what habits you can establish to eventually reach those goals.

This step is a critical one and this is probably where you’ve had your focus for some time but felt like you’re drowning in getting day-to-day costs sorted. When you get your budget right, you can actually start achieving some of your goals — those big life goals you’ve had in the back of your mind but have felt out of reach.

Generally speaking a short term goal is anything that will be achieved within 5 years, anything longer than that is considered long-term.

step 10: consider investing in your future

We want to flip your headspace from simply just trying to make it through the week, to preparing financially for your future - investing in your future. This isn’t just investing in things like shares or property (although, yay!), it’s investing in your career, your health, your relationships. Money is impacted by all of these areas. Get your health, in particular, to the top of your priorities list! It doesn’t have to cost heaps - in fact many healthy habits are free - but your health determines how you perform in every area of your life so make it #1!

Likewise your career is one of the biggest drivers of wealth creation in your life, so invest in it! Check out Shelley Johnson and Glen James’s career book, Sort Your Career Out & Make More Money to get inspired! We want you to have an investing mindset - investing in your life, and the lives of others.

our parting tip: make generosity a part of your budget

We believe that the wealth we build doesn’t just help us, it can be directed toward the movements, people, organisations and projects that we love to see supported. What organisations or things do you want to see improving or growing out in the world? It could be anything from alleviating poverty to renewable energy! Whatever is in your heart to support, plan for it in your budget.

To sort your money out, check out Glen James’s book, Sort Your Money Out & Get Invested! It’s an easy to understand guidebook on how to get your money under control and working hard for your future.