FMS – Part 3 – Creating a Budget in 5 Easy Steps

Creating a budget does not have to be a scary thing.  

This is Part 3 – Creating a Budget in 5 Easy Steps, of the Foundational Money Series. In Part 1 – Net Worth Statement we looked at determining your financial starting point.  Part 2 – Goal Setting helped determine where you are going financially.  Now in Part 3 – Creating a budget in 5 easy steps we will figure out how you are going to reach your financial goals.

At one point in my life, I thought that creating a budget was meant to be restrictive and that budgets were set in stone.  Once you determined a budget you should stick to it no matter what.  Even if it meant eating macaroni and cheese for a week straight.

What an unrealistic expectation.  

Now I think of a budget as a flexible account of your coming money coming in and going out.  That’s not to say I’m willy-nilly with creating a budget.  I still believe every dollar has a role – I’m just more flexible as to what that role is.

A budget is telling your money where to go instead of wondering where it went

Dave Ramsey

Creating a budget can be overwhelming.  Just googling how to create a budget will bring you multiple different formats and how to’s.  So how is this method different?  It keeps things simple.

Here’s the secret to any and all budgets – spend less than you make, pay off debt and save for the future (short and long term & emergencies).  That’s it!

Now that I’ve told you that, why keep reading?  I’m going to show you how this all works in reality (not just theory).  I will also share some of the tips and tricks I’ve figured out along the way.

Let’s get started, here are the 5 easy steps to creating a budget.

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Step 1 – Record

For this step, you want to record all your spending and income for the past 3 months. 

I suggest doing this step for the first time with paper and pen.  It makes the numbers more real.  Eventually, you can evolve into a spreadsheet or online app.

Check out Living Low Key if you are looking for a practical budget binder printable.  They have a free one on their website.

Now is the time to get out all of your debit and credit card statements or log in to your online banking.  If you use cash for everything then for the next 3 months save all of your receipts and start this step in 3 months.


Once you have all of your information then you can start categorizing all of your expenses.  I like to categorize my expenses into fixed and variable costs and then into further subcategories such as food, transportation, entertainment, etc.

Examples of what I put in the fixed expense category:

  • Housing costs (mortgage or rent)
  • Groceries
  • Insurance
    • Life
    • Automobile
    • Property/Tenant
  • Utilities 
  • Property Taxes
  • Debt Repayment

Examples of what I would put in the variable expense category:

  • Transportation
  • Vehicle Maintenance
  • Housing Maintenance
  • Entertainment
  • Kids
  • Clothing
  • Eating Out
  • Travel
  • Fitness or gym memberships
  • Donations
  • Gifts
  • Pets
  • Miscellaneous

Your subcategories may differ and that’s totally okay.  Once you begin writing things down you will start to see your own subcategories emerge.

For every one of your subcategories add up all the expenses and divide by three for a monthly average.

Next, it’s time to look at your annual expenses.  Write down any expense that you pay annually and divide by 12.

I personally hate having to worry about bills every month.  I pay as many things as I am able to annually.  For example, property taxes and insurance (life, vehicle, home).

Creating a Budget in 5 Easy Steps.  Everything you need to know to create a simple and effective budget. #budget #easy #handfulofthoughts


Now that we have focused on your average monthly expenses, it’s time to look at your income.  

For a salaried monthly employee, this is easy.  For someone with a variable income, record your income over the past 3 months and then divide it by 3 to find the average.

If your income fluctuates a lot month to month then you may need to calculate your annual income and divide it by 12 for a more accurate number.

Step 2 – Review

Now is the time to look at all the numbers – no judgment.

Here are some questions to ask yourself when reviewing your numbers.

  • Is there any subcategory that appears obviously out of balance?
  • Does your spending align with your values?
  • Are you getting enjoyment out of what you spend your money on? If not, ask yourself why?
  • Does your spending align with your goals?  If you have not spent some time thinking about your short, intermediate or long-term goals now is a good time to do so.

During the Review step, you also want to see what line items can be eliminated, improved or negotiated.


What expenses are showing up in your subcategories that you can eliminate altogether? Maybe you have been paying for monthly memberships that you weren’t even aware of?  

I have a friend who paid for 2 years of Spotify and never used it.  She had signed up for the free trial and then forgot to cancel – for 2 years!

When we first joined our finances, my husband had a monthly vehicle payment.  I hated having that recurring expense every month.  Although we were not able to immediately eliminate this expense we made it a priority. After a few months of ramping up our debt repayment, we were able to pay off the vehicle loan in full.  

This eliminated that line item from our budget and freed up that money for other things.

What ghost expenses are hiding in your budget?


Budgets are not about deprivation.  There are certain things that I have no desire to cut from my budget. Nevertheless, that doesn’t mean that I have to be happy with what I am currently paying.

A few years back I decided to look around for a different insurance company for my home and vehicles.  My home and vehicle had both been broken into and my current insurance company had terrible customer service in dealing with the claim.  

I had been with this company for over a decade and felt like I was not valued as a customer at all. So, I began calling around to get a few quotes.  

Low and behold I found a company that had a partnership with my husband’s employer.

Switching over our insurance to this new company ended up saving us over $500 a year – every year!  This was well worth the few hours of my time that it took to hunt down this deal.  

Insurance companies often offer various discounts for different things – don’t be afraid to shop around.

My cell phone is another sticking point in my budget.  Before I focused on optimizing my budget I just signed up for a plan and paid my monthly bill.

My husband and I both have cell phones and two plans add up month after month.  I use my phone a lot for personal and business. My husband on the other hand barely uses his at all and when he does he is often somewhere with wi-fi.

A friend had suggested Public Mobile.  Public Mobile is an ultra-low-cost cell phone carrier.  Their service is off Telus towers so the coverage is great where we live. 

Just for signing up for Public Mobile with this link, you will earn a $10 credit on your first bill.

What’s the catch? You have to have your own phone (which we both do) and there is no customer service to call.  Everything is done online through crowdsourcing.  You can earn a discount on your bill by going online and answering other people’s questions.

We’re not interested in going online to answer people’s questions for a few extra dollars every month so we don’t take advantage of that.  But since switching my husband’s plan we have reduced his phone bill by 50%.

We switched his plan to Public Mobile to test the waters.  Now it has been a couple of months and he’s happy with the service and we are both happy with the rate.  I will be switching over my coverage the next time they have a juicy sign-up deal.

Other areas where I’ve optimized and improved my expenses are groceries, gym memberships, gas, and travel.

What expenses can you optimize and improve?


Are all your expenses and income lines set in stone or can they be negotiated?  What are the best deals you can get?  In the beginning, I was very hesitant to negotiate my bills.  Over time my confidence has grown and my bills have decreased.

Taking a few hours to negotiate your bills and credit card debts can make a huge difference to your monthly and annual budget.

Prior to moving to our new house, I knew that we would have a period of time that we would not need our internet.  I called up the internet company intent on canceling my internet for a few months. 

Our plan was to hook up our internet in our new place under my husband’s name.  This way he would look like a new customer and we could hopefully take advantage of a promotional deal.

When I called the internet company they told me that I could put my service on hold for up to 6 months.  Seemed like an okay deal, but then I would still be paying more than I wanted to when re-activating.  Because of my negotiating they offered to decrease my bill by 30% when I reactivated.

My bill would never have decreased if I had not called.  The internet company would have been happy with me continually paying the same amount.  However, they would not have been happy if I left therefore offered me a better rate to stay.

As mentioned previously my husband changed cell phone carriers for a low-cost alternative. Our plans had been previously joined so when he left, the cell phone company called me.  I told them that I was planning on changing carriers unless they were going to give me a better rate.  

I was able to increase my plan and get it for 25% cheaper every month.  Not a huge amount of money in the grand scheme of things but all these little discounts and negotiations add up.

Another often overlooked area of your budget that can be negotiated is your income. Millennial Boss has a great guide for negotiating your salary.  Check it out if you think there may be some upside potential to your income.

Before trying to optimize my budget I never would have thought about negotiating my bills for better rates.  Now I do it all the time, what do I have to lose?  The worst they can say is no and I’m back to where I started.

Take some time to look at the expenses that you can negotiate.  Get the numbers for customer service and block off some time in your calendar to make some phone calls.

Step 3 – Determine Your Budget

Now that you have reviewed all your expenses and income for the past 3 months it’s time to determine your numbers.

For every subcategory you wrote down in Step 1 you are now going to decide what your estimated spending will be each month.  Base these numbers on your findings from Step 2.

For example, my budget has $1000 set aside for food, $300 for kids, $300 for gas, etc.

An easy way to keep track of this is to have 3 columns.  One column for the list of subcategories. The next column for the budgeted amount for each subcategory.  The last column is for the actual spending in each subcategory (which we will get to later).

When determining your budget make sure to include debt repayment (if you currently have debt) and savings.

How much should you be saving every month? I would argue as much as you comfortably can. A general rule of thumb is to save 10% of your income. 

If you can manage to save 20% or more that’s awesome!  

Right now, if you can only save 5% that’s okay, it’s a start.  Plan to increase this savings rate as you get control over the other line items in your budget.  

Maybe you use some of the methods mentioned previously for decreasing your expenses and increasing your income.  Once your income is increased and your debt is decreased those extra funds can be put towards savings.

When totaling up your determined numbers make sure your budgeted amount does not exceed your income every month.  If it does, you have 2 options.  You can cut out more line items from your expenses.  Or you can increase your income.

I’m not a fan of depriving myself.  Once I have cut out all unnecessary items from my expenses I tend to favour increasing my income.

There are tons of side hustles out there that can help you increase your income. If you cannot get a raise at work side hustles let you give yourself your own raise.

Step 4 – Implement Your Budget

This is the step where you put your budget into action.  Remember those 3 columns you made earlier? Keep track of all your expenses and total them up in the actual column.

The observer effect is a theory that explains that observing something causes that specific something to change.   Just the act of observing your expenses and income will cause a change in your budget.

The next time you go to use your credit or debit card you may think twice about it. You may question if that expense will fit in your budget.  Or if that expense aligns with your values and goals.

Implementing the budget you created could take a couple of months.  Focus on making small changes every week and you may be surprised by what happens.

Automate as Much as You Can

The less you have to think about things the better (and the less likely you are to forget or miss something).

You can set up automatic bill payments and automatic money transfers.

Out of Sight Out of Mind

One thing that I have done that has really helped is setting up automatic money transfers. My savings go directly out of my checking account and into my savings account the day after I get paid.

If I don’t see the extra money sitting in my checking account, then I am less likely to spend it.

Pay Yourself First

Once you have done your budget calculations then you will know how much you can save or put towards debt repayment every month.  

As soon as your paycheque comes in move that money to the appropriate places (savings account or onto your debt).  If you wait until the end of the month to pay yourself, you may run out of money before you run out of month.

Step 5 – Re-Evaluate Your Budget

After tracking your new budget for a few months it’s time to reassess.  This doesn’t need to take as long as the first time you recorded your numbers but it is an important step.

Going back to the questions you asked yourself in Step 2 is a great start.

Compare your budget column to your actual column.  Are your budgeted numbers fairly accurate or do they need to be readjusted? Where are the gaps in your budget that require improvement?

During your re-evaluation take some time to notice and celebrate the positive changes you have been able to make in a short time.  Did you eliminate any unneeded expenses? Were you able to negotiate better utilities rates?  Did you increase your emergency fund?

Recap – Creating a Budget

  • Step 1 – Record
    • Expenses
      • Variable
      • Fixed
    • Income
  • Step 2 – Review
    • Eliminate
    • Improve
    • Negotiate
  • Step 3 – Determine Your Budget
  • Step 4 – Implement Your Budget
    • Automate as much as you can
    • Out of sight, out of mind
    • Pay Yourself First
  • Step 5 – Re-Evaluate Your Budget

Final Thoughts

Creating a budget is a major step in personal finance and financial independence.

But it does not need to be intimidating, nor does it need to take a lot of time. You will find that taking a few hours to set up a budget and then at most an hour to check in every month can make huge differences in your financial future.

Creating a budget is not about deprivation and can be very liberating.  You will feel in control of your money as you align your spending to your goals and values.  

If your numbers are not where you would like them to be – that’s okay.  That just means there is some work to be done. Remember there are ways to decrease your expenses and increase your income without having to deprive yourself.

Now that I realize that my budget is flexible I am much more forgiving with myself if I go over some months.  Sometimes I go over in one category but then come under in another.  I focus on paying myself first and continuously keep my goals and intentions in front of me.

Don’t make your budget complicated – if you do you won’t want to follow it.

Remember when creating a budget, keep it simple – make more than you spend, pay off debt and save as much as you can.

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