How To Start a Budget — and Build Savings — From Scratch

The general rule of thumb is to have enough savings set aside to cover at least three months of living expenses. That way, if you lose your job or if there’s a sudden financial emergency, you have something to fall back on.

However, millions of Americans don’t even have a budget, much less any money in savings. In fact, around 25% of adults have no savings whatsoever. Less than half of American consumers have the recommended three months saved.

It can be tough to start a budget and stick with it, but it can be even harder to start building savings for a rainy day. If you’re having trouble with this, read on to learn how to establish a budget that works.

Set a goal, but keep it realistic

Two of the biggest reasons why people overspend and don’t have money in savings are as follows:

  • Having no specific goals. Without financial goals, there’s no incentive to save any money.
  • Not having a budget. A budget is more than a handy tool for managing your money – it’s a necessity. Without a budget, it’s easy to overspend and get caught up in a vicious cycle of debt.

When it comes to setting goals, start small and keep them realistic. That way, it’ll be easier to achieve them. For example:

  • Don’t set a goal to save $500 by next spring. Instead, plan to save $50 or $75 a month from now on. If you have more disposable income and feel comfortable doing so, increase this amount a little.
  • If you owe thousands of dollars in credit card debt, don’t worry about paying it off this year. Instead, try to increase how much you’re paying a little each month and watch the balance drop.

Once you have some short-term or mid-range goals, you can start setting some long-term goals, too.

Start with an emergency fund

An emergency fund is a certain amount of money set aside for expenses you don’t expect. This could be things like a medical bill or sudden unemployment. It’s similar to savings in that it offers financial security in times of hardship. However, the money in an emergency fund is kept separate from regular savings and isn’t part of any investments. It’s also not meant to fund any short-term or long-term goals.

To create an emergency fund, here’s what you can do:

  • Create a realistic budget. Figure out your total income, separate your expenses into categories, and cut back on areas you don’t need.
  • Decide how much you want to save. Based on your budget, determine how much money you can set aside each month for the emergency fund. This could be any amount — $50, $100, $250, etc. You’d be surprised at how quickly even $50 a month can grow after a few months. Set aside money until you have enough to cover three to six months of expenses.
  • Evaluate and change your budget. Setbacks happen. If you haven’t saved as much as you wanted to after a few months, make the necessary changes.
  • Be persistent. You don’t have to rush to create an emergency fund, but persistence will help in the long run. Even when things are tough, keep moving forward and setting aside what you can until you reach your goal.

Write down your goals

Writing down your goals is a great way to make sure you accomplish them, especially if you keep them somewhere handy. This is because it serves as a constant reminder of what you’re trying to achieve. Plus, it provides a feeling of accountability and could help motivate you going forward.

By writing down your goals, you’ll be able to measure your progress. This is especially true for long-term goals.

First steps

If you’re still having trouble starting a budget or creating some savings, here’s what you can do.

Keep track of your paychecks

Every time you get paid, write down the date and amount. This will help you keep track of your income, as well as ensure you’re getting paid the amount you should. After all, even employers can make mistakes. Microsoft Excel and Google Sheets are a convenient way to do this.

Add up all your income sources

Earned income, or the amount you make from your job, is the most common source of income. However, some people have multiple income sources such as interest, dividends, or passive income. Add up everything you make in a given month for your total income and record the information in a spreadsheet.

Add up monthly expenses

To successfully create a budget, start by adding up all your monthly expenses to see where your money goes. Expenses like rent, mortgage, utilities, phone bill, and credit card minimums are usually easy to track. Other expenses, like an automatic monthly subscription to a streaming service or small trips to the gas station, could be harder to track. Check monthly bank statements for any withdrawals.

Write down everything you spend for a month

Write everything down — and this means everything — for a month to make sure nothing slips through the cracks. Do this every day to see where you are at month’s end. Start with common expenses like groceries, utilities, rent, entertainment, car payments, gas, insurance, meals out, gifts, and various online purchases. Write down any other expenses, like payments to a credit card or loan balance, too. Don’t forget any cash you might withdraw to pay for random daily purchases.

Compare your spending with your earnings

After the first month, it’s time to compare your spending with your earnings. Say, for example, your total monthly income is $2,225 while your monthly spending is $2,175. This doesn’t give you a lot of leeway, but the extra $50 is a good start for an emergency fund or savings. See if you can cut back on things like monthly subscriptions or entertainment to increase this amount.

Divvy up your paychecks

First, determine how much you spend each month on fixed expenses (things that don’t vary from month to month) and the essentials. This includes mortgage or rent, car payments, health insurance, utilities, gas, and food. Add up these expenses and subtract them from your total income. For instance:

  • Total income: $3,000
  • Fixed expenses and essentials: $1,750
  • Remainder: $1,250

Take the remaining amount and break it down for any other expenses you haven’t already considered. While doing this, set aside a small amount for savings or an emergency fund, too.

If your expenses are higher than your income, then you’re at a financial deficit. Look for any areas you can cut back on such as entertainment or other non-essentials. If you’re still struggling financially, it may be time for a change. Here are a few options:

  • Get a roommate or move back home for a few months (if you aren’t on a long lease)
  • Ask your employer about any overtime opportunities
  • Take on a side gig such as babysitting or ridesharing
  • Move to a cheaper part of town
  • Sell things you don’t use or need

Set a strict limit on how much you spend, particularly for non-essentials and non-fixed expenses. You may be able to cut back on gas, for instance, by driving less for a while. If your electricity bill runs high in winter or summer, try to use the A/C or heater a little less. Even small changes can make a huge difference in how much you spend and save each month.

Also, set up a sinking fund. A sinking fund is essentially a small amount of money used to pay for smaller expenses that don’t fit into any specific category or your normal budget. This includes things like medical bills, holiday shopping, and car-related expenses.

Take away the ability to overspend

Americans overspend on things like groceries, entertainment, and online shopping by an average of $7,400 each year. With the convenience of debit and credit cards, it’s both easy to overspend and harder to keep track of your money.

Here are some ways to prevent overspending:

  • Cut up all but one or two credit cards.
  • Bring cash instead of card when you go out. If necessary, bring one card for emergencies only.
  • Start paying off any outstanding debt (credit cards, loans, etc.) to reduce monthly interest and other fees.
  • Put some cash in an envelope to cover day-to-day expenses like gas or groceries.

Set up a budgeting app

Budgeting apps are a convenient, easy way to establish a monthly budget. Here are some free options:

  • Mint. This budgeting app allows you to connect all your bank accounts in one place. The app tracks every withdrawal and deposit and separates monthly expenses into categories. Unlike other budgeting apps, Mint also monitors your credit score, which is helpful if you’re trying to build credit. Downside: In-app advertisements.
  • Simplifi. Simplifi syncs with your bank accounts to track your monthly spending. It also helps you create a personalized spending plan. Downside: It costs $35.99 a year after the first month.
  • Honeydue. Designed for joint budgeting, Honeydue tracks your bank accounts, savings, investments, lines of credit, and other loans. It also breaks down and categorizes your monthly expenses. With Honeydue, you and your partner can also establish monthly spending limits to prevent overspending. Downside: In-app advertisements and no desktop version.
  • Pocket Guard. Pocket Guard makes it easy to sync your bank accounts, set spending limitations and savings goals, and monitor your cash flow. Downside: It costs $79.99/year or $7.99/month after the first month.

Break down all your expenses

Break down your expenses into four categories: yearly, monthly, weekly, and savings. If any areas fluctuate, round up for some wiggle room.

Yearly expenses

Common yearly expenses are:

  • Celebrations or holidays like Christmas, Hanukkah, and birthdays
  • Annual physicals or other medical checkups
  • Income taxes
  • Family vacations or trips
  • Vehicle registration fees or tag renewals
  • Changes in insurance premiums

Tally up these figures, divide them by 12, and set aside that amount of your monthly paycheck to prepare for them.

Monthly expenses

Monthly expenses are among the most crucial expenses since they take up the bulk of your total income. These expenses include:

  • Rent or mortgage
  • Auto payments
  • Utilities – electricity, water, sewer, etc.
  • Cell phone
  • Insurance – auto, renter’s, homeowner’s, medical
  • Prescription medications, if needed
  • Loan payments – student loans, personal loans, etc.
  • Credit card debt

Weekly expenses

Although you can combine weekly and monthly expenses, it’s better to create a separate category when starting out since it helps you keep track of your money better. Common weekly expenses include:

  • Food
  • Entertainment – movies, restaurant meals, dates, etc.
  • Gas
  • Transportation
  • Miscellaneous


It’s impossible to prepare for everything but having some money in savings provides a sense of financial security, especially when times are tough.

Set up an automatic monthly transfer from your checking to your savings account through your bank. Even if you only have $20 to start, this will add up. Also, see if you can prevent accessing your savings account through an ATM to keep yourself from spending the money. The account should be accessible for emergencies, but not so readily available that you spend the money when you shouldn’t.

Learn the difference between wants and needs

Sometimes, it’s difficult to distinguish between wants and needs. Yet, this is important if you want to improve your budgeting and spending habits.


Food is a need, but a luxury meal out with friends or a fancy steak is a want. Indulge on food only if it fits into your budget and doesn’t end up on your credit card. Here are some ways to save on this category:

  • Don’t buy in bulk. Buying in bulk will only save you money if the food doesn’t spoil before you eat it.
  • Check for sales. Check the local grocery store for weekly or holiday sales. Plan your shopping trips and meal planning around them.
  • Look for coupons. See if your local stores have loyalty discounts, digital coupons, or newspaper coupons. Look for any coupons that stack for extra discounts.
  • Get the store app. Some stores have a digital app that automatically finds and applies coupons for you. Find and download the app for discounts.
  • Freeze food. If you find a great deal on bulk items, freeze the raw ingredients to extend their shelf life. Or make a large batch of the dish and freeze the leftovers for later.


Clothing is a need in some cases, such as if your current clothes are worn or if your job has a certain dress code. However, designer clothes and garments from high-end brands are wants. Give yourself a small allowance in your budget for clothing.


Everybody needs somewhere safe and clean to live. Your shelter shouldn’t be infested with bugs or have mold, but it doesn’t have to be a high-rise luxury apartment or three-story house either. If you’re struggling with finances, get a roommate or two until you have enough money to live alone.


Although often overlooked, medicine – prescription or over-the-counter – is a need. Still, there are some ways to cut back on spending here.

  • Look for coupons or discounts on your medications. is a great option.
  • If your prescription medication is too expensive, ask your doctor or a pharmacist about switching to a generic version for a fraction of the cost.
  • Check with your health insurance provider for any discounts or a better rate.


Break down “wants” and look for areas you can cut back on such as groceries or gas to save more money. Avoid impulse buys, too, since they can seriously hurt your budget. The serotonin boost may make you feel happy at the moment, but this will wear off before long.

Still not sure about the difference between a want and a need? Here are some examples:

  • A trendy coat when you already have a fully functional one is a want. A coat in winter to replace your old, threadbare one is a need.
  • A new pair of shoes when your old ones are worn through is a need. A fourth pair of shoes you just happen to like is a want.
  • Organic food is a want. Store-brand food is a need.

If you don’t need it right away, then it’s probably a want. When in doubt, wait until the end of the month to buy any non-essentials. By then, you may find you no longer want whatever it was in the first place.

Want to know more about budgeting for beginners? Check out this video:

Common budgeting mistakes

Besides not having a budget at all, here are the most common budgeting mistakes people make.

Spending too much on subscription services

Subscription services like Netflix, Disney+, Amazon Prime, Hulu, and Spotify may be inexpensive individually, but they add up quickly when you’re paying for multiple a month. Cut back on services you rarely or never use. If you miss a canceled service, wait a month or two before resubscribing. If you only use the service during the holidays or when certain shows come out, then only pay for them as you use them. Avoid automatic payments if possible.

Spending too much on meals away from home

The average household spends around $3,500 a year on meals outside the home. This doesn’t include gas or after-meal drinks. Keep an eye on your budget to prevent overspending.

Neglecting the small things

Small expenses like monthly membership fees or website hosting are easily forgotten, especially when they’re on auto-pay. Check your account regularly for these things and cut back where possible.

Cutting out fun

Some people think they can’t have a category for fun or entertainment in their budget, but this simply isn’t true. It just needs to be calculated, and it may change based on emergencies or temporary circumstances. Try to budget between 5% and 8% of your total income each month for fun.

Never updating the budget

Expenses change, as does income. Go back to your budget every few months and after major life changes to make sure everything is on track.

Guessing rather than knowing

It’s easy to overspend when you’re guessing how much money you have or need. Try to be as exact as possible with your finances. If you must guess, round up your expenses so you have more than expected at the end of the month.

Ways to fix these budgeting mistakes

Looking for a solution to these budgeting mistakes? Here are some options.

Create a plan that works for you

No matter how many financial experts you talk to, or how much advice you get, only you know what works best for you. Establish a realistic budget and savings plan you can follow.

The key here is to spend less than you earn. Once you’ve accomplished this, put any leftover money into an emergency fund. After you have enough to cover a month of expenses, start paying down debt.

Change your mindset

It’s hard to change your mindset about money, but it’s also necessary. Now that you know where your money goes each month and how much wiggle room you have, you can start saving. For example, take shorter showers to save on water, buy generic brands, and look for discounts before heading out. With some time and consistency, it’ll become second nature to save.

While doing this, prioritize saving money and building an emergency fund. Try to pay off any credit cards, too, since this will open up some cash each month for you.

Once you’ve done this, start contributing to an investment or retirement account like a 401(k). If your employer offers matching 401(k) contributions, take advantage of this. For those who are self-employed, open up and contribute to a Traditional or Roth IRA to start earning compound interest.

Reassess regularly

Your financial situation and your priorities will shift over time. Assess your budget and reallocate money every so often to make sure you aren’t as strapped for cash at the end of the month.

Give yourself time

Money habits take time to change. Don’t give up just because you don’t have as much in savings as you wanted or because it’s difficult to follow a budget. Be persistent and take your time.

The bottom line

Ultimately, if you want to save money or build an emergency fund, you need a realistic budget. Figure out where your money goes each month and evaluate your spending habits and priorities to make this possible. It will take some time, but it’ll happen.

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