Financial Security Step 6 - Create a budget - Balanced FI

Financial Security Step 6: Create a Budget

Create a budget to intentionally take control of your finances. Adjust your budget every month to better reach your goals as you pay off debt.

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If you’re new to the Financial Security Steps, start here: Welcome!

In Financial Security Step 1, you tracked your expenses. The steps since then have been gathering financial information to use to create a budget. Your mini emergency fund will help protect against most unforeseen problems and your retirement contributions are automated. You now know how much to set aside for monthly and annual recurring expenses.

Calculating your net worth gave you a starting point for your financial journey and helped you layout your debt payoff plan. All of that information is going to be useful for this step.

Why don’t you already have a budget?

I asked my husband his thoughts on this question. His response felt perfect to me – people are afraid to see how bad it really is. I know we were. My mental math said we had about $10,000 in credit card debt. Sitting down and putting the information together showed it was actually $18,000. Stocking up on supplies at the beginning of COVID and plane tickets for a flight we never got to take ballooned that to $20,000 in February 2020.

That was a stressful and embarrassing time for me. I have a master’s degree in accounting. I handle our money. I’m qualified. And we were still in this situation, for 2 reasons:

  1. we had not been intentional with our money for years
  2. we were both happy living in denial of the situation (until the whole global pandemic thing) because we were able to pay the bills

I would like to blame the medical costs and upheaval of having a child with special needs, but honestly, it started long before having kids. We were just living, but not planning ahead. Luckily we had automated retirement savings, but we didn’t pay really attention to our finances beyond that.

My point is, I get it. Know that you can change your behaviors and habits, but it will take intentionality and focus. You need to figure out why you’re struggling with money, then work to make changes.

How to use the Budget Planner

  1. Create a Starter Budget based on average spending the last 3 months
  2. Make adjustments to get a Final Budget – one where income less expenses is 0, or any extra income goes to either debt payoff or a mini emergency fund. Expenses should not be higher than income.
  3. Use the Monthly Budget on page 2 to create a budget each month after. Tweak the numbers as needed for your life & goals.
  4. Refer to the Category Suggestions to make sure you’re budgeting for everything you spend money on
  5. Use your preferred budgeting app, Excel sheet, or paper & pen to track your monthly purchases & compare to your budget

Get your free Budget Planner HERE

Gather information to create a budget

Budgeting can feel really overwhelming when you’re first starting out. That’s why I had you gather so much information before even starting your budget. Proper preparation will make it easier to fill out the Budget Planner.

Account for retirement

When creating a budget, you list income and subtract expenses from that amount. Make sure to take your retirement contributions into account. If you are contributing to an employer-sponsored plan, your retirement contribution (and possibly health insurance premiums) are withheld from your paycheck. You don’t actually see that in your bank account; you just receive a smaller paycheck.

If you are contributing to a private retirement account, you need to list that amount on your budget because it doesn’t automatically come out of your paycheck. Do the same if you are actually paying for health insurance instead of having it withheld from your checks.

Average the transactions you already tracked

In Step 1: Track your Expenses, you decided what categories are meaningful to you and should be tracked. Some people want to know exactly how they spend on water, sewer, and power, while others are happy to see the total utilities amount. Choosing categories that work with your personality will reduce the stress you feel over budgeting or tracking expenses AND make it more likely you’ll actually do the tasks.

Look at the totals of each category from the last 3 months. This is your starting point for budgeting. Put the average of the 3 months in the Budget Planner’s Starter Budget column. Don’t worry about comparing expenses to income or whether these amounts are reasonable. You’re going to adjust your budget soon.

All of your recurring expenses should go under the Bills category – these should be paid from your “bills” checking account. This includes rent/mortgage, utilities, internet, auto registration, and more

Make sure to include your recurring expenses

In Financial Security Step 3, you calculated the per paycheck cost of your recurring monthly and annual expenses; you will include those in your budget as well. Make sure you don’t double-budget – once for the expense and once for the transfer to your “bills” account.

All you need to do is multiply “total bills per check” from Step 3 times the number of paychecks in the month. Input this in the Bills section of the budget. Keep your Save for Recurring Expenses Worksheet with your budget. This will make it easier to evaluate whether you need to cut back on recurring expenses.

Budget for minimum debt payments

If you have extra leftover after everything is budgeted, you should add it to the Extra Debt Payment line, assuming you have already established your mini emergency fund. I want you to start with budgeting just the minimum for debt (listed on your Debt Payoff Planner), to get a real feel for how much these burdens are impacting you financially.

Paying only the minimum will drag out the payoff process for your credit cards, so you need to work toward paying extra on your focus debt. However, it’s not always possible to pay the same amount extra each month. It’s easiest to have a base budget consisting of the minimum payments.

Get your free Budget Planner HERE


Add up your income, add up your expenses, then subtract the expenses from the income. If the difference is a positive number, you have extra money! Put that amount in the Extra Debt Payment line. If/when you’re debt-free, this money can go toward building a larger emergency fund, saving for other large purchases, or retirement.

If the difference is negative, you need to complete the Final Budget section of the Budget Planner. This is where you will work on cutting back expenses to balance your budget. It’s simple to say that your expenses should be less than your income, but it’s definitely not simple to get to that point. You might have to ruthlessly cut luxuries or find ways to generate extra income.

Make reasonable adjustments

If your expenses are greater than your income, there’s obviously work to do. Cutting one category by 50% is likely going to be too hard to do all at once. You cannot easily go from spending $700 on dining out in a month to spending $350. Trying to do so during your first month of budgeting will probably just discourage you and convince you to stop.

Successful, long-term budgeting isn’t going to happen by making huge changes on paper. You have to make those changes in real life too. Create a budget that reflects today, then make small changes that you can live with. Once those changes are comfortable, cut more as needed.

If you’re spending $700 on eating out, try cutting that amount by $100 each month until you get to a number that balances your budget or (even better) allows for extra debt payments. A slow decrease method worked for my latte habit.

Another option to cut back on spending is a freeze (no spending in that category for a certain time). Use my 30 Challenge Tracker to stay motivated for a 30 spending freeze or 30 no-eating-out challenge. This method worked for my family to drastically reduce the amount we spend on eating out. I think the challenge worked because it forced us to meal plan and actually follow that plan.

Just be honest with yourself. You need to make changes, but you also need to be reasonable about your abilities. Push yourself but don’t break your will to change.

Get your free Budget Planner HERE

Create a monthly budget

After refining your base budget, use it as a starter for your monthly budgets. You’ll likely have to make changes each month, because life happens, but this is a good place to start. The gifts, eating out, and groceries categories can change based on your social calendar. Your auto insurance may increase and your electrical bill will vary (unless you sign up for budget billing, which I recommend!).

Category Suggestions


You’ve already figured out how much to set aside for monthly bills, but still include this figure in your budget. This will give you a better idea of how much you have left to cover debt, food, and everything else.

Make sure to include any insurance premiums you pay out of pocket. If you have a mortgage, your homeowners insurance is likely included in the monthly payments as part of the escrow, but renters insurance should be a monthly bill. I also recommend life insurance for anyone with a family, and disability insurance if you have less than 6 months expenses saved.


On the Debt line, budget for the minimum payments. Include your mortgage in the Bills category, not Debt, because you’re not focusing on paying off the mortgage yet. It’s such a huge amount for most people that it makes sense to pay off smaller debts first, save for emergencies and retirement, then pay off the mortgage.

Again, if you have extra money left in the budget, put that on the Extra Debt Payment line… UNLESS you don’t have a mini emergency fund established. That should be your first priority.


Budget for groceries and dining out. If alcohol or coffee shops are a problem for you, consider separate budget lines for them. It’s easier to control your spending when you’re fully informed.

If you need some guidance, the USDA provides monthly Cost of Food reports (see an excerpt of the November 2020 table below). Using this table, my family of 4 (with a 1-year-old and a 5-year-old) should spend $529.60 a month on the thrifty plan or $1030.80 a month on the liberal plan. We budget $700 just for food (diapers, etc. are “household items”), so we’re in the lower range. Challenge yourself to move toward the thrifty plan amount, while still maintaining good nutrition.


Household items

We like to split household items from groceries in our budget, but they’re all usually purchased at the same type of store. Diapers, baby wipes, cleaning supplies, and paper products are included in this category. I used to lump them in with groceries, but they were skewing that budget. We don’t buy diapers or toilet paper every month, so we would go over the grocery limit if we happened to need both in the same month…and we still needed food.

I also include shampoo, soap, and similar items in this category. If you have a makeup or hair product obsession, consider a separate category to get a handle on that spending.

Vehicle expenses

Unless you don’t have a car, make sure to budget for gas or diesel, as well as routine maintenance. We budget $300 for gas and $50 for maintenance. If we don’t have an oil change or wiper replacement that month, the $50 rolls over to next month. In Every Dollar, these are called sinking funds. While we’re in debt payoff mode, any large repairs come from our mini emergency fund.

Annual license renewals or registrations are included in the Bills category.

Fun money

This category is optional, but very helpful for staying on track with your bigger goals. We plan for $40 each every time my husband is paid (every two weeks). Pre-COVID, I got cash from the ATM every pay day. Now, we each have an online checking account and I have automatic transfers setup from our main checking account.We both use debit cards to spend our fun money.

I usually save most of mine for larger, unnecessary purchases (an Apple Watch was the most recent) and spend some on lattes or snacks when I’m transporting kids. My husband spends his on food at work when forgets to pack a lunch, and he’s saving up for some ridiculously priced binoculars with a range finder feature (don’t even ask me).

This works well for us because it allows us to have some indulgences while still sticking to our overall budget. We each spend our how we want and can still pay off debt.

Medical costs

This category can include health insurance premiums (unless they’re already withheld from your paycheck), deductibles, prescriptions, co-pays, and co-insurance. Medical costs are very personalized, so I can’t advise how much to budget. Look at your previous spending to get a feel of where to start.

You can use your mini emergency fund for large unexpected medical costs. An emergency room visit counts, but your monthly chiropractor appointment is not an emergency and should be budgeted for.

Clothing, personal care, gym/workout apps, etc.

These are separate categories for us but could be grouped together if you’d like. Personal care covers haircuts and massages mostly. The budgets are pretty loose and I often move funds between the two or the Miscellaneous category depending on the month. It’s hard to predict when the kids will grow and need new clothes or if my tight muscles will need a massage that month. Flexibility is important to staying committed to a budget too.

If you have a gym membership or subscribe to some kind of workout app on your phone, include that in the budget. Be honest with yourself though – are you getting your money’s worth? Either cut the gym or schedule time to start going, but don’t throw that money away.


We have a separate category for pet food, litter, and supplements. This category also covers vet visits, which have become more frequent as our dogs get older. Any major expenses, such as a surgery or imaging, would come from our mini emergency fund.

Entertainment & babysitting

Pre-COVID, we planned for monthly date nights. It’s hard to find someone qualified and willing to care for our oldest daughter, so we usually didn’t even manage a monthly date. Now, our dates involve watching a movie together after the kids are in bed. If it’s safe and feasible, definitely budget for a babysitter so that extra cost doesn’t sneak up on you and ruin a night out.

We also have a category for bowling. My husband is (usually) in a weekly bowling league, so it’s easiest for me to plan on that amount in a separate category.


I put $50 a month in this category. It’s to cover anything I don’t plan on. Usually, I move the budgeted funds to the category of the expense (move it to Pet Expenses if we have an unexpected vet visit, for example). It’s nice to have a little buffer because we all know life doesn’t go according to plan.

Get your free Budget Planner HERE

Budgeting can be boring and stressful, especially at first. As you become more comfortable with your financial situation, it gets easier. One day, it’ll probably even be fun, because you’ll feel in control and confident.

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