How to Set Up a Budget

If you’ve ever tried to set up a budget before, you’ll know that while it sounds easy, it can turn into a huge project. You start with the basics first, but then suddenly you’re asking yourself ‘well, is that coffee with my co-worker a fun expense, or is it a networking expense? What about when I had to buy shaving cream? The spouse/SO and I don’t share shaving cream, so is it a personal expense or a household expense?’

If you don’t over-think setting up your budget like I do, I am impressed! But if you’re anything like how I used to be, this post is for you.

How to Set Up a Budget

Structure Your Budget

Since working professionally as a budget/finance analyst, I have learned a few master-level tips to setting up budgets. You will want to focus on fixed costs versus variable costs. This is really just a fancy way to say, when you set up your budget, you want to focus on things you absolutely must pay for (mortgage/rent, electricity, etc.), fixed costs, versus things that aren’t absolutes (coffee budget, household expenses, etc.), variable costs.

When setting up your budget, start with how much you or you and your spouse (if you have a joint account) make monthly. Your monthly salary (which should include any ‘off’ money you make from taking online surveys or overtime at your job) is your starting point. This is where all of your budgeted expenses will be subtracted from.

Fixed Costs

Let’s set up your budget by starting with all of your fixed costs. Based on my budget, here are things I absolutely must pay for, every month, or else.

  • Mortgage
  • Car Insurance
  • Electricity
  • Water/Gas
  • Student Loans
  • Cellphone

Try to make this list as short as possible – although we all need food to survive, your grocery budget probably has a little room in it, enough room to make it a variable cost. If some months you may have to eat more beans and less meat, while other months you can splurge and buy a $10 bottle of wine, your grocery costs are not fixed.

Some may disagree that cellphones are a fixed cost, since some people could live without a cellphone and use a (not an affiliate link) VoIP service, but I need my phone for work, so I consider it a fixed cost.

Variable Costs

The next things you will want to evaluate when setting up your budget are your variable costs. One thing I will want to strongly caution you against when setting your budget is getting too specific. While it may seem like a good thing to do, your ‘personal’ category can quickly descend into ‘personal – household’ ‘personal – networking’ and the dreaded ‘personal – misc’.

Whatever you do, try to avoid the heinous miscellaneous category. You’ll be surprised how, week after week, your miscellaneous category grows in amount until you have no idea whatever was miscellaneous in the first place. Think broad, not narrow.

Here’s an example of my variable costs, and yes, sometimes I am guilty of still being too narrow. It’s a work in progress (also, this is in no particular order):

  • Gifts/Birthdays
  • Pets (includes food, vet bills, occasional toys)
  • Personal Upkeep (this includes all my personal hygiene products plus my hair cuts)
  • Gas
  • Groceries
  • Toiletries/Costco
  • Blog Expenses
  • Emergencies
  • Household

A few notes on some of these categories: my travel budget is small – around $25 a month unless I have a trip planned, then I increase it to account for what I plan to spend. I don’t spend $25 a month, but I ‘put’ $25 into this account to build up my travel savings.

For the toiletries/Costco budget, we buy the majority of our toiletries (toilet paper, paper products, tissues) from Costco, which is why they go into the same category. If I buy groceries at Costco, which is rare, I put those amounts into the grocery budget.

Household sounds like a miscellaneous category, and while it is somewhat of a catch-all, for me it means household upkeep expenses, like when B was remodeling the backyard, plus cleaning supplies for the house.

Fun money/Date nights encompasses date nights, obviously, but also my $20 a month Starbucks addiction. For my fellow coffee addicts, yes, $20 a month is really low, but I supplant it by buying and making my own coffee.

Blog expenses – pretty self explanatory. Blogs, at least if you purchase your own domain like I did, aren’t free. ☺

Now It’s Your Turn

Feel free to use the categories I use for your own budget – you probably will have different categories than I do, especially if you have kids. Don’t feel guilty if you have more categories than I do, either! Everyone is different, and you may want to break down your expenses further.

If you have a joint account with your spouse/SO, you may also have more categories that break them down further. B and I don’t have a joint account, so expenses like groceries are halved, since we take turns buying them.

Now that we have categories set up for your budget, it’s time to plug in numbers. You may already have a rough estimate on what you spend monthly for groceries, but I’d advise against guessing. Collect all your receipts for a month, or two if possible, to get a good estimate on what you spend monthly. If you mostly purchase things on your card, like I do to track all my expenses, you can log in to your online account and go back several months to get a more accurate estimation of what you spend monthly.

Be honest with yourself: if you spend $500 a month on groceries, don’t give yourself a budget of $250. Remember to subtract all of your estimated expenses from your monthly salary which, again, includes all ‘off’ money you make too, in addition to your regular job.

If your salary doesn’t over all of your estimated expenses, it’s time to reduce some things. Reduce your ‘fun’ budgets, like fun money or gifts. If that’s not enough, maybe you can reduce household or personal expenses. Try not to reduce grocery or gas too much, unless you’re absolutely sure you could save money by cooking cheaper. If you’ve estimated well, you’ll notice sometimes there’s not as much room in your gas budget as you’d expect!

Try this budget for a few months, and let me know how it goes! Setting up a budget doesn’t have to be hard or overwhelming as long as you think of your budget in terms of fixed versus variable costs.

Have you set up a budget for yourself, and how did it or how is it going? How do you structure your budget?


Melissa @ Sunburnt Saver

I blog about personal finance, with an emphasis on saving, for young adults. Join me on my journey to avoid debt (and sunburns) and navigate life after college!