How to Create a Budget: A Step-by-Step Guide for Beginners

The word “budget” can make a lot of people nervous. It brings up images of complicated spreadsheets, cutting out all the fun from your life, and feeling restricted.

But what if we reframed it? A budget isn’t a financial straitjacket; it’s a spending plan. It’s the single most powerful tool you have to tell your money where to go, instead of wondering where it went.

Creating a budget is the foundational first step to achieving any financial goal, whether it’s paying off debt, saving for a house, or just ending the month with some money left over.

This is your simple, jargon-free, step-by-step guide to creating your very first budget that you’ll actually stick to.

Step 1: Know Your Numbers – Track Your Income and Spending

You can’t create a plan without knowing your starting point. For one month, your only job is to gather data.

Track Your Income: Tally up all the money you have coming in after tax. This includes your salary, any side hustle income, and any other regular payments.
Track Your Spending: This is the most eye-opening part. You need to track every single penny you spend. Use a banking app that automatically categorizes your spending (like Monzo or Starling), a budgeting app, or just a simple notepad.

At the end of the month, add it all up. You now have a clear, honest picture of your financial reality.

Step 2: Categorize Your Spending – Needs vs. Wants

Now, take your list of expenses and divide them into three simple categories:

Fixed Expenses (The Needs): These are the essential costs that are roughly the same every month.
- Examples: Rent/Mortgage, council tax, utility bills, phone contract, transport costs, groceries.
Variable Expenses (The Wants): These are the non-essential, lifestyle costs that change each month.
- Examples: Eating out, subscriptions (Netflix, Spotify), shopping, hobbies, holidays.
Savings & Debt Repayments: This is where you’re building your future or paying for your past.
- Examples: Pension contributions, ISA savings, credit card payments, loan repayments.

Step 3: Choose Your Budgeting Method

There’s no single “best” budget. The best method is the one that works for you. Here are two of the most popular and effective methods for beginners.

The 50/30/20 Rule (The Simple & Flexible Method)

This is a brilliant starting point. You allocate your after-tax income as follows:

50% on Needs: All your fixed, essential expenses.
30% on Wants: Your flexible, lifestyle spending.
20% on Savings & Debt: The portion dedicated to your financial goals.

This method is great because it’s simple to remember and gives you the flexibility to spend on things you enjoy without feeling guilty.

The Zero-Based Budget (The Hands-On & Powerful Method)

With this method, you give every single pound a job.

How it works: You start with your monthly income, and then you subtract all your planned expenses (needs, wants, and savings) until the total equals zero.
Formula: Income – Expenses – Savings = £0
Why it’s great: It forces you to be intentional with every penny. You’re in complete control, and no money is left unaccounted for. This is perfect for people who want to aggressively pay off debt or save.

Step 4: Set Your Budget, Review, and Adjust

Now it’s time to create your plan for the month ahead. Based on your chosen method, allocate a specific amount to each of your spending categories.

The most important part: A budget is not a set-it-and-forget-it document. At the end of each month, review your spending. Did you overspend on takeaways? Did you have an unexpected expense? Life happens. The goal isn’t perfection; it’s progress. Adjust your budget for the next month based on what you’ve learned.

Creating a budget is the first, most empowering step you can take on your journey to financial freedom.

Your Journey to Financial Control Starts Today

Taking control of your money is a skill, and it all starts with a plan.

What’s your biggest challenge when it comes to budgeting? Have you tried one of these methods before? Share this post if you found it helpful, like it to show your support, and join the conversation in the comments below!