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So, do you really know what you spend… or are you just guessing?

I’ve got some bad news for you…

If you’re the kind of person who "just can’t stick to a budget," it’s probably because you’re using a made-up budget for a made-up person, not real numbers from your real life.

In other words, your budget belongs in the fiction section of the library.

I know, because I suffered from this same issue throughout most of my twenties.

No matter what I did, my budget was always impossible to stick to. After blowing past my spending categories month after month, I would inevitably throw my hands up in the air and just be done with it.

I repeated this same song and dance every year until I turned 27… and maxed out a credit card. That’s when I realized I needed to get my spending under control.

The Good News

The good news is, everyone can create a budget that works. It might not be glamorous, and yes, it will require some homework and a bit of math, but trust me, it's entirely doable. By understanding your actual spending habits and adjusting accordingly, you'll create a realistic budget that not only fits your lifestyle but also moves you toward your financial goals.

Ready to roll up your sleeves?

I’ll be honest — doing it right takes a little time.

It’s so much easier to just throw together some categories, say, "Oh, I probably spend $50 on utilities and $80 a week at the grocery store, $10 a month on this, $40 on that, maybe $100 eating out… Done!"

But that’s exactly why your budget never works.

If you want your budget to actually work, it has to be based in real numbers. Outside of actually making your budget in the first place, this is the second-most important piece to creating a budget that actually works.

And where do we get those real numbers?

That’s right, from your actual spending — preferably three months’ worth.

Why such a long time period? Because we don’t actually spend the same amount of money on the same things every month. I don’t know anyone who gets their hair cut every 30 days. But I know a lot of people who get their hair cut at least once every three months.

By going back three months, you’ll get a more accurate picture of how much money you’re spending, and that’s crucial to making a budget you can stick to. Even if you ultimately decide you need to dial back your spending, you’ll be able to do so realistically. You probably won’t be able to stick to a $100/week grocery budget if your current spending is closer to $400.

Now that we know where our numbers are coming from, let’s dive into the nitty-gritty of setting up a budget that sticks.

1) Do Your Budget Prep

First things first, set a timer for five minutes.

Next, decide how you’re going to make your budget. Do you want to use an app? A spreadsheet? Or good ol’ pencil and paper?

There are thousands of different apps and spreadsheets designed to help make a budget, but you don’t want to get bogged down looking for the perfect one. If your timer goes off and you still haven’t made a decision, just move forward using pen and paper. You can always change it up later.

Next, gather up your financial documents. You can do this digitally or with paper statements, whichever you typically use. For example, I do all of my banking and bill paying online, so, for me, this process looks like signing into the websites for my bank and credit cards and then clicking on recent transactions.

You’ll want to be able to see all your money coming in and going out; your incoming and outgoing bank transactions, as well as any credit card transactions. 

If you like to use cash, gather up all your bills — e.g., grocery bills, dinner bills, monthly bills for utilities, rent or mortgage, insurance, recurring services (pest control, lawn care, etc.), as well as any subscriptions and other regular financial commitments you have, like student loan payments or childcare expenses.

2) Start By Listing Your Income

Start with income. If you’re freehanding it on paper or in a spreadsheet, call this column "income" and underline it, bold it, draw a box around it — it’s your budget, you can do whatever you want.

Next, list all the money you expect to receive this month and the source. This includes your regular paycheck (if you have a salaried job), but don’t forget to include any extra money you might get from side jobs, freelance work, selling items, investment dividends, rental properties, etc. If you're retired, be sure to include all retirement-related income sources, like Social Security benefits, pension payments, and withdrawals from retirement accounts like 401(k)s or IRAs. If you share finances with a significant other or spouse, include their income as well.

As you’re writing this down, give every payment its own line. Remember to work with net income, which is what you actually take home after taxes and deductions.

When you’re done, it should look something like this…

INCOME

Your Paycheck: $3,500

Spouse’s Paycheck: $3,500

Freelance Job: $500

Garage Sale: $250

Total Income: $7,750

Don’t just list the income you can think of; really lean on those financial documents you gathered. Look through your statements and stop at every transaction where money is coming into your account. Unless it’s money being returned to your account (a refund for a shirt you decided not to keep, a friend paying you back for their share of a dinner bill you split), it’s probably income.

Does your income vary from month to month? Look at your earnings over the past few months and use the lowest amount as your planned income for the month. You can adjust this figure later if you earn more, and allocate any extra money to your financial goals or other budget categories.

3) List Your Expenses Using My “Budgeting Backward” Method

Now, it's time to list all your expenses.

The typical recommended categories people like to budget for are... Housing, Transportation, Food, Utilities, Clothing, Medical/Healthcare, Insurance, Household Supplies, Personal, Debt, Investments, Education, Savings, Gifts/Donations, and Recreation/Entertainment.

Most people like to make a list of all the spending categories and then list their expenses in that category. If this works for you, awesome! Party on.

Personally, this has never worked for me. I come up with great categories and solid expenses for each one… and then blow right through my budget the next month on all the things I don’t think of.

To make sure nothing escapes my budget, I budget backward. By that, I mean I start with my expenses and then categorize as I go. I start at the top of my bank transactions and go line by line. To illustrate, I’ll use the last five transactions from my account…

Trader Joes $70… This first transaction was for groceries. I write out "Groceries" as a new category column and underline it. On a new line just below "Groceries," I list the expense — "Trader Joes $70."
Whole Foods $87 … Second transaction is also for groceries. Hey, I’ve already got that category. Just need to list the expense. On a new line under the first expense, I write the second one — "Whole Foods $87."

Nanny $500 … Third transaction is paying the nanny. I need a new category for that. To the right of "Groceries," I write "Childcare." Just need to list the expense. On a new line just below "Childcare," I list the expense — "Nanny $500."

CVS $53… We fill three prescriptions at CVS, so this transaction means we need a new category. To the right of "Childcare," I write "Prescriptions." Just need to list the expense. Below "Prescriptions," I list three expenses, each on their own line — "[Medicine A] $8," "[Medicine B] $25," "[Medicine C] $20."

Car Wash $10… This is exactly the kind of expense that I never remember. While I take my car through a car wash from time to time, I don’t do it with any kind of consistency. I just do it whenever the car seems dirty. This doesn’t fit into any of the other categories, so I’ll make a new one, "Car." Under it, I list the expense — "Car Wash $10."

Keep going through your spending transaction by transaction. If an expense falls under a category you’ve already listed, just write it on a new line in that column. If an expense doesn’t fit under any of the categories you’ve created, make a new category, and then list the expense on a new line under that category. They can be as general or as specific as you want, as long as it works for you.

Be sure to do this for any account you spend money through. If you use credit cards, repeat this exercise for those transactions as well.

Once you’ve gone through all your expenses for the past three months, add up the total and then divide by three. That is your average monthly spending for that category.

Once I have all my expenses listed and categorized, I take another pass to make the whole thing organized.

I list the essential categories first — the things I’m paying no matter what — as well as the average monthly spend for the category. For me, these include mortgage, insurance, utilities, groceries, childcare, car, home maintenance, debt… things like that. I also like to include an essential category called "Buffer" and assign it $100. This category will help prevent us from spending more than we have by carving out wiggle room for every month.

Then, I list the non-essential categories along with their average monthly spend. My current non-essential list includes dining out, subscriptions, entertainment, tennis, and clothing, along with many others. These are all still important categories in mybudget, but if push comes to shove, I’m going to pay my mortgage before I spend a single dollar on a tennis lesson.

Your categories and your essential/non-essential list will look different from mine. In fact, your entire budget will probably look different from mine. That’s good! Your budget is supposed to be a reflection of you and your spending. My budget will not work for you.

4) Subtract Expenses from Income

Now that the hard part is over, it’s time to see where you stand.

Subtract your expenses from your income.

Are you spending more than you make? Don’t panic, it happens to the best of us. This is your opportunity to scrutinize your spending and make strategic cuts or find additional income sources. It's all about finding balance. I like to make a red slash threw my old number and write the goal number next to it, that way I can come back and see if my new budget was too unrealistic.

Do you have money left over? Fantastic! Time to put that money to work. Think about the financial goals you want to accomplish. Consider increasing your savings, investing in stocks, or paying down debt faster. Let every dollar work toward building a more secure financial foundation.

No matter what, this is your moment to make adjustments to each category. Want to stop spending so much money eating out? Look at your current average monthly spend and cut back a realistic amount — a goal you can actually meet — and increase your "Buffer" category by the same number. You can always adjust again next month.

Also consider whether there are any upcoming events or expenses that you need to budget for. Are you going on vacation? Be sure to account for extra spending on souvenirs. Wedding coming up? Don’t forget to add your gift into your budget. To make this work, look at your "Buffer" and other non-essential categories for funds you can redirect to non-recurring expenses.

Once you’re done, double check that your expenses equal your income and ta-dah! You’ve created your budget!

5) Track Your Transactions

Time to stress test your budget.

For the next month, track your transactions. Log every expenditure and subtract it from the relevant budget category. This practice helps you stay within your budget and prevents overspending.

Regularly review your budget and make adjustments as needed. If you exceed your budget in one category, reallocate funds from another category to cover the excess. If you underspend, redirect the surplus to other financial goals, such as savings or debt repayment.

Pro tip: Schedule regular budget reviews, whether daily or weekly, to monitor and adjust your budget. There are dozens of really great apps available that can sync up with your bank accounts and provide real-time tracking.

6) Prepare for the Upcoming Month

As the current month draws to a close, analyze your budget to identify what changes you need to make for the upcoming month. Adjust for any expected changes in income or expenses and plan for irregular expenses like seasonal purchases, annual subscriptions, or special events.

Always strive to finalize the next month’s budget before the current month ends. This proactive planning helps manage unexpected expenses without straining your finances and ensures you start the new month with a clear financial plan.

Setting a budget isn't just about tracking dollars and cents; it's about taking charge of your financial future. With a well-planned budget, you can alleviate stress, achieve your financial goals, and eventually have the freedom to make choices that enrich your life. Remember, a budget doesn’t limit your freedom; it creates freedom.