The Definitive Guide

This is a detailed personal budget guide.

In this guide you’ll learn, step-by-step, how to create a budget including:

  • Why budgeting is important?
  • How much to spend?
  • How much to save?
  • Different budgeting techniques
  • Improving your money handling
  • Sticking to a budget

Let’s get started, right now.

Personal Budget income


budgeting list expense


Why Budgeting?

budgeting list expense

Step 1.

Create a Budget Protection Fund

budgeting list expense

Step 2.

Calculate your net income

budgeting list expense

Step 3.

List monthly expenses

budgeting list expense

Step 4.

Understand Budgeting methods

budgeting list expense

Step 5.

Prepare the budget

budgeting list expense

Step 6.

Track spending regularly

budgeting list expense

Step 7.

Review & adjust the plan

budgeting list expense


Take the next steps!


Why Budgeting?

You definitely need a budgeting plan:

  • if you’re tired of struggling to survive from pay-cheque to pay-cheque

  • if you can’t figure out how your monthly income drains out

For many, budgeting may sound like cutting down the expenses only.

Nope, I want to tell you, budgeting is all about spending money wisely!

In fact, budgeting is one of the most effective tools in personal finance planning.

And, no you don’t need to be a finance pro to make an effective budget.

Investing pana

What and Why : Personal Budget

What is a Budget?

A budget is an estimation of spending against what you plan.

There is no rocket science involved in it; it is simply what you do everyday.

A household budget is a plan of your monthly income against your monthly expenses and savings.

A budget helps you balance your income, expenses and savings.

What is budget

Often people think of slashing spending and restricting the expenses when they first hear of budgeting. I wouldn’t say that’s entirely wrong. But which expenses to cut from? How will you prioritize the spending?

Budgeting is an essential aspect of achieving financial independence. Without a concrete budgeting plan, you might not be able to achieve the financial success you always wished for.

Budgeting is an effective tool to manage our earnings. It helps you manage your monthly income effectively.

Even if you don’t feel a need for budgeting, it will make life easier for you.

But first, let’s talk about why do you need a budget at all?

You may be living a financially sound life where your requirements are being met without any difficulty. 

That’s a great achievement in itself. Congrats! You’re doing well already. 

But is that all? What more you can do to make your life easier? 

I’ll tell you a few compelling reasons how budgeting becomes an integral part of your life without you being aware of it.

Let us walk through it.

Why is Household Budgeting Important?

You can surely count the monthly income at your fingertips. I won’t be surprised either if you know all of your monthly expenses by heart.

But then why can’t you save money? You took a small bank loan, and it snowballed into a large personal debt with never-ending EMIs. You could never pay it off in-full.

Let’s look at some of the fascinating reasons how budgeting helps.

Helps You Navigate Economic Ups and Downs.

You should always be ready for unexpected economic downturns. With an effective budgeting plan, you’ll be able to save for contingencies.

If you have a financial backup, I really don’t need to convince you that it will naturally lift your immune system. Will it not?

Helps you Get Rid of Bad Debts.

Can you pay off your debt with a household budget? Yes, you’ll have to allocate a substantial portion of your income to repay your debts. Debts keep rolling up because you don’t figure out how to reduce the principal.

Don’t just keep paying monthly interest on your personal loans; pay-off the debts entirely much ahead.

Reveal Your Spending Personality.

Spending habits are what shape your financial personality. Ever wondered when you went to buy a pair of shoes and end-up buying an additional shirt before you reach back home.

A Stanford study revealed that 5.8% of the shoppers are compulsive buyers.

Not every shopper is compulsive, neither all of us are shopping addicts.

Once you get into budgeting habits, it will change your spending psychology completely.

You’ll be Able to Invest Better.

Very much common-sense, right? But it isn’t as straightforward as you might think. Income, Debt, and Investment go hand-in-hand when it comes to managing your finance. Your personal wealth-building strategy will immensely rely on your investment plan.

Oh, and did I tell you: you wouldn’t be living paycheque to paycheque anymore once you get into the budgeting habits.

Now that you are convinced of the importance of budgeting let’s dive into a step-by-step roadmap to create a budget that works. Right now!

What about the budgeting apps?

 While there are tools available to make the budgeting process more manageable, they will not replace the knowledge necessary for you to become a better budgeter.

So, it is crucial to start with a manual method and understand the process. Afterwards, you can take assistance for certain aspects like tracking and managing expenses through apps and web software.

I will discuss that aspect of using apps and software in another guide.

Let’s jump into the most critical part of the budgeting – the PROCESS!.


Create a Budget Protection Fund

Everything that is important needs a protection.

Budget is no different.

A fund is created exclusively to help the budget not to derail. 

Think of it as an insurance for the budget!

But, you won’t lose anything if you don’t use, unlike an insurance premium.

Savings cuate

The problem:

The #1 reason many budget plans fail is: something “unexpected” hijacks it in the middle.

Let me explain.

You make a budget plan. In a few days, something that you did not expect shows up out of nowhere—for example, a hospital expense.

Guess what?

You have to take out the money you planned to save and spend it. What about the budget plan the? Well, it just goes for a toss.

Two or three such surprises make you lose interest in budgets.

If you also went through these challenges and stopped making budget, hold on, there might be a solution. 

The Solution:

I strongly recommend you to make a budget protection fund. In layman terms it is called a rainy-day fund.

It helps you to safeguard your monthly savings goals and expenses. So, effectively, it protects your monthly budget.

Remember, it is not the same as the emergency fund. You should keep these two separates since the purpose is different.

Budgeting Workbook

Frequently Asked Questions (FAQs) on Budget Protection Fund:

Question: How much should I keep aside for the budget protection fund?

Answer: A month’s expense should be good enough. 

Question: Where should I keep the budget protection fund?

Answer: A sweep-in FD or liquid mutual fund.

Question: What if I take money from it?

Answer: Fill it back as soon as you can. Your priority for the next few months should be to keep the money back into this fund.

Question: What if I run out of all the money in budget protection fund?

Answer: Well, it just means there was something bigger that happened. You may consider getting a part of your emergency fund.


Calculate your net monthly income

Taking stock of your income is an important activity as the source of your money.

You can plan your expenses to be inline with the income.

Listing the income from all sources is equally important.

Let’s start counting! 

Make it rain cuate

List all the income you receive. Consider both active and passive income.

Active income comes from the activities you do regularly —for example, income from Salary, Commission.

Passive income comes from your assets without your active engagement or little efforts. For example, interest from a FD (Fixed Deposit), rental income.

To make you budgeting process easier – I have created this workbook where you can list your income.


Always count in the income after deducting taxes. Don’t consider gross income.

If you are a salaried person, it is also called take-home income. It is the amount that gets deposited into your salary account each month.


budgeting workbook

Find the templates you will need to:

  • Capture income
  • Capture expenses – weekly, monthly
  • Write savings goals
  • 50-30-20 Calculator
  • Weekly Review
  • Monthly Review

What if you are self-employed?

What if you are self-employed or business owner and generate an uneven income stream? Well, I have you covered. Calculate your monthly average income for the last year.

Here is how you do it:

Step I: Take the monthly income for the last 12 months. Check your bank statements, if needed.

Step II: Include any passive income such as rent received, interest from a savings account, etc.

Step III: Deduct taxes and other compulsory expenses, e.g., insurance

Step IV: Divide the total income by 12 to get the average monthly income

budgeting list uneven income

Pro Tip: Count in all your income sources of the family members.

Remember, your monthly income and expenses will change over time. Even if your earnings remain stable, inflation will make the expense figures change.


List your regular monthly expenses

It’s interesting to see how the money vanishes.

Well, the fun part is we do not REALLY see it vanishing!

It just happens.

Listing the expense will help you see where will it go. 

Let’s list them right now.  

budgeting list expense

If you observe your expenses closely, you incur two types of expenses:

  • Fixed expenses
  • Variable expenses

You should carefully estimate each type of expense that you come across every month.

At this stage, do not try to reduce any expenses. Jot down each expense as it is. We’ll get to the point where you’ll have to discard the unnecessary ones.

So, how do you categorize the monthly expenses? Let’s see with some simple examples.

What are your Fixed Expenses?

Simply put, these are the necessary costs that will show up on your budget every month. Say, your house rent or kids’ education fees.

Here is a sample list that includes usual fixed household expenses:

  • House Rent
  • School Fees – mainly the monthly fees
  • Loan instalments including home loan, car loan, and personal loan
  • Insurance premiums
  • Property taxes
  • Any other expenses recurring for the next 6-9 months regularly

What are your Variable Expenses?

Variable expenses are the ones that change the total cost with your usage. The amount varies depending on how much you use. Say your electricity consumption, which is proportional to the monthly usage.

Here are a few variable expenses as an example for you:

  • Utility bills, including electricity, water, gas, mobile, etc.
  • Groceries
  • Travel and transportation
  • Clothing and other shopping
  • Dining out and leisure

Now that you know both type of expenses, go ahead and fill them.

Leave the ‘Type’ column empty. We will come back to it soon in the following steps. I promise. 😊

budgeting list expense fixed v

So then, is that it? Unfortunately, not. It is not the end of your expenses list. There is a third category of expenses that people often forget about.

Seasonal Expenses:

You’ll certainly not like the fact, but most people cannot manage the budgets because they do not take care of seasonal expenses. Oh, and I am not talking about seasonal clothing expenses only.

Looking at your calendar can help you see what’s coming up!

Think of seasonal expenses as:

  • House repairs and maintenance- e.g., painting your house
  • Car and bike’s significant repairs
  • Seasonal shopping expenses for religious festivals like Diwali, Eid, or Christmas
  • Occasional travel and family gathering expenses
  • Gifts for family and friend’s marriage
  • Kid’s birthday party

There can be a number of seasonal expenses that will vary from person-to-person. Take some time to think about seasonal expenses and list them. 

Consider it for the year which will give you a good window to think on the seasonal expenses.

budgeting-seasonal expenses

Make sure you make a list of all the expenses you can think of. Pull in the seasonal expenses into the respective monthly expenses and list.


Understand Budgeting methods

Budgeting is an act of balance.

You can balance in different ways.

Understanding various methods available is essential.

You can then choose which suits your style and needs.

A right method can help you better manage your finance in a way that is most convenient for you.

Let’s take a look!

Budgeting methods

There are several different budgeting methods. These are the frameworks that help you manage your expenses and income in a better way.

Here are some of the most commonly used ones.


Traditional Budgeting:

The most common type of budgeting is the traditional way of listing each expense and income. You can then simply compare the totals and find the differences. Slash some of the unwanted expenses until you break-even.

However, traditional budgeting still is an effective method. Its simplicity doesn’t imply you can’t achieve effective results with it. You can get things started with the most basic and traditional approach.


The Envelope Budgeting:

It is yet another common method that is being used for ages. With this method, you’ll gather all the income at once.

Create envelopes for all spending types. You’ll only use the cash for each spending from the designated envelope.

There are chances that you’ll empty the envelopes before the finish line, but that’s fine. Iterate the process until you find perfection.

By any chance, if you get surplus cash, roll over it to the monthly income total of the following month.


Zero-based Budgeting:

Zero-based budgeting means allocating each rupee of your income to an expense.

Simply put, you need to use each paisa effectively.

Prioritize and categorize your expenses and start allocating expenses as we did above with percentage allocations.

The aim of zero budgeting is you shouldn’t waste any hard-earned income. The more you save, the more you should put that money into savings or investments.


The famous 50-30-20 Budgeting method:

This famous budgeting method says allocate your total income (100%) as:

  • 50% against your Needs
  • 30% against your Wants
  • 20% against your Savings
budgeting needs wants savings 50-30-20

Needs: Items that help you nourish yourself, your family and survive. These are the things you absolutely require to survive.


  • groceries
  • rents
  • utilities

Wants: items that are not a must but make you happier.


  • dining out
  • movies
  • tours and trips

Savings: The amount you keep aside for future use.


  • For retirement
  • an amount for the down payment to buy a home
  • investing in stocks
  • mutual funds

This method stresses categorizing the smaller expenses into pooled large categories for easier management.

Have you noticed all of these methods follow a similar pattern? Indeed, each budgeting method adopts a similar method.

You are the right person to decide which budgeting method will best work for you.

In this guide, I will use the 50-30-20 budgeting method.

It is straightforward and easy to understand.

It’s suitable for someone getting started with budgeting.


Prepare the Budget

You know how much you earn.

You know what are your expenses.

So, time to setup the budget.

This is a critical step where you define the boundaries for spending.

Not just that, you’ll also look at how much to save and how to keep yourself motivated on saving goals.


Budgeting prepare

Part A. Time to Pay Yourself First

You should make savings a priority from the income that you receive. The pay yourself first is an important idea that should influence your budget.

From the net income, take out 20% of your money towards your savings. The rest is available to spend on various things.

Use the 50-30-20 Calculator to get:

  • how much you should save
  • how much you should keep for expenses – both in the needs and wants category
budgeting needs wants savings 50-30-20

In this example, you should be saving ₹13,000 based on the income.

Part B. Identify Savings Goals

Instead of just saying – let me save this much amount, come up with savings goals.

This will help you to be motivated that you are taking out an amount that will be used for a useful purpose in future.

Plus, you will be more committed to achieving it.

Tips for writing the savings goals:

  • Have a name for your goal. It attaches an emotion. 
  • Be specific. Instead of “save for a house down payment”, write as “save ₹12,00,000 for buying apartment”.
  • Mention target dates. Whether you want to buy an apartment or purchase a new car, you will have to have a date by which you want to achieve it. Mention a target date by which you want to reach there.
  • Write how will you reach. This is the motivation factor that will keep you practice savings every time you generate an income.

For example, mention you will “save ₹5,000 every month from the salary income for the next 5 years. If I get additional money, I will add it to this fund so that I can buy a home earlier, if possible.”

    budgeting financial goals

    Part C. Mark Each of the Expenses as Need or Wants

    Now that you understand which expenses are needs and which ones are wants go ahead and mark them accordingly in the type field of the Expenses sheet.


    N – if the expense type is Needs

    W – if the expense type is Wants

    Both – If an expense falls into both category

      Budgeting Expenses marked

      Part D. How Are You Doing on Income and Expenses?

      Next, check if your expenses are less than your income after savings.

      If yes, you are in good shape in handling the income and expenses within the means.

      If no: then the 50-30-20 budgeting method will help you spend your money on the most important things that matter and manage your income.

      To be super clear, in any case, check using the 50-30-20 method to see if you are:

      • saving decently, which should be approximately 20%
      • spending money on the right things (50% needs and 30% on wants)

      In this case, let’s see how are we doing:

      Your expenses are Rs. 54,025.

      You can see the expenses are higher than the income after savings which is Rs. 52,000.

      Our situation:

      Let’s get back to the example case we are looking at. Which strategy can we use?

      The situation is the expenses (Rs. 54,025) are more than income after savings (Rs. 52,000). The expenses are 2,025 more than what is available to spend.

      First, are there any expenses from wants that you can cut and forego some fun?

      I see if you can use the first strategy to cut down on a couple of wants.

      If the expense on new clothes can be reduced to Rs.2,000, we can save a thousand rupees.

      Also, if the dining expense is reduced to Rs.1,000, we can save another thousand rupees.

        Strategies for handling

        I. What to do when my expenses are more than income after savings:


        1. Cut down on wants. Consider reducing some money on one or more wants and see if it balances.
        2. Postpone an expense. Can something wait for the future? If yes, try to do it.
        3. Can you live without an expense forever? Then just strike it out completely.

        II. What to do when my expenses are less than income after savings:


        1. Put the money back to the emergency fund/budget protection fund if you have taken it from.
        2. Move the additional money to savings.
        3. Use the extra money for anything you postponed.
        4. Consider if you need to spend it on an item you eliminated earlier.

        Our situation:

        Let’s get back to the example case we are looking at. Which strategy can we use?

        The situation is the expenses (Rs. 54,025) are more than income after savings (Rs. 52,000). The expenses are 2,025 more than what is available to spend.

        First, are there any expenses from wants that can be cut and forego some fun?

        I see if you can use the first strategy to cut down on a couple of wants.

        If the expense on new clothes can be reduced to Rs.2,000, we can save a thousand rupees.

        Also, if the dining expense is reduced to Rs.1,000, we can save another thousand rupees.

          budgeting expenses


          With these two adjustments, you can see the balance (don’t worry about the Rs.25, as many of the expenses are estimates and the actual amount varies to an extent).

          Part E. Are you spending reasonably on needs and wants?

          Now that you have marked the expenses, check to see if you are spending money on needs and wants reasonably.

          How are you spending?

          What if you are spending too much on needs and less on wants:

          This can happen when you are spending more on necessary things than you can afford.

          For example, rent is a need.

          You may choose to live in an expensive house. This may lead to large portion of your income being spent on rent. You should reconsider if it is the right house compared to your earnings.

          Why is it essential to balance? Well, spending too much on needs may hamper your general lifestyle. You may be sacrificing certain things (wants), which is also vital to lead a happier life.

          For example, you may rather prefer to live in a smaller house and take your family for a trip two times a year in the amount saved. Agree?


          What if you are spending too much on wants and less on needs:

          It’s possible you may be spending on things that give you instant gratification. While these may bring happiness in the short term, you may be living well under your means. For example, living in a house that is less expensive than you can actually afford.

          On the other hand, it is possible that you have a pretty good income and your needs are well-taken care of with the lower percentage of income.

          For example:

          You earn 2 lakh rupees a month and have a wholly-owned house and car without any loans to pay.

          You save Rs.40,000, and your needs are taken care of in Rs.60,000 per month.

          In such a case, you may be spending the rest of Rs.1,00,000 on wants.

          While you are okay in terms of needs, you should rethink if you should spend on wants or restrict them to 30% (Rs.60,000). Move the extra money into savings (Rs.40,000).

          Remember, 50-30-20 is a guideline and not a rule that you must restrict the percentages. Adjust it to your best interest!

          Our situation:

          Let’s see how are we doing on the percentages in our scenario.

          See that I have marked ‘Both’ as the type for Miscellaneous expense.

          For the sake of simplicity, I will assume the amount you spend on Miscellaneous will have both needs and wants. So, I will take Rs.2,000 for needs and Rs.2,000 for wants.

          Sum of Needs: Rs.47,025

          Sum of Wants: Rs. 5,000

          You see the spending on needs is higher.

          This okay when you are getting starting with the budget. But consider bringing it closer to the 50-30 ratio, considering the points we just discussed. The situation stabilizes over time.

          Wow! You now have a budget that you can follow. Congratulations!

            For those of you who are more detail-obsessed

            We talked about needs and wants at a broader percentage (50 and 30). You may be wondering if there is any recommendation for specific expenses within needs and wants for each type of expense. Well, here are some guidelines on that as a percentage of your income.

            Don’t scratch your head too much. By percentages, I mean allocating income against each expense. You’ve already calculated the total monthly income.

            Frankly, there is no one-fits-all solution when it comes to allocating expenses. Each individual has to determine the priorities explicitly.

            From expert researches, which work well for almost everyone, here is a break-down of a regular budget:

            • Housing expenses like rentals or loan instalments – 25%
            • Utility expenses – 10%
            • Food – 10%
            • Insurance expenses – 10%
            • Vehicles and transportation – 10%
            • Entertainment and leisure-10%
            • Clothing and accessories – 5%
            • Miscellaneous – 10%

            Or, you would like to follow advice from someone really good at personal finance. Wouldn’t you? Here is the famous Dave Ramsey formula to allocate your budget percentages:

            • Giving or Charity — 10%
            • Saving — 10%
            • Food — 10% to 15%
            • Utilities — 5% to 10%
            • Housing costs — 25%
            • Transportation — 10%
            • Health — 5% to 10%
            • Insurance — 10% to 25%
            • Recreation — 5% to 10%
            • Personal spending — 5% to 10%
            • Miscellaneous — 5% to 10%

            Tip: Don’t be surprised if your total allocations exceed the 100% figure. You’ll find the balance ultimately. Remember, I told you budgeting is an act of balancing.

            STEP 6:

            Track your spending regularly

            Keeping a note of expenses is a crucial activity.

            It may not be the most fun activity though, but very important. 

            Find the right time to log the expenses to the tracking sheet.

            Consistency is the key.


            budgeting track your spending

            Keeping track of the expenses is REALLY a key in keeping up with the budget.

            Well, I agree that it may not be too much fun. But it is crucial to know your spending behavior.

            This is not only to make a list of things you spend money on but also to be conscious of where and how you are spending.

            So, do it with due diligence. You can record the expenses as and when you make them. However, if that is not possible, do it at the end of the day before you go to bed.


              When you record an expense, do note if the expense was a need (N), want (W) or was it entirely not planned (U) in the budget.

              Unplanned expenses (U) can hamper your budget plan. It would help if you kept them marked separately.

              Review the unplanned expenses at the end of the month. See if you have to make provision in the budget if some unplanned items are coming up repeatedly.

              STEP 7:

              Review the plan regularly and adjust

              Budget, like any process will evolve over time.

              Yes, you should learn from what worked and what did not.

              Keep the working and change what’s not. 

              Making the periodic reviews helps you in making your budget and your financial life rock!


              It is essential you take a look at how you are regularly doing with your plan. After all, it’s the money matter!

              I suggest you do two types of reviews:

              Weekly review – Every week to see where you spent money in that week. Also, to see how you are doing concerning the overall budget available.

              Monthly review – At the end of the month, which is also the period you planned the budget for.

              Weekly Review:

              From the expenses tracking sheet, add all the spending in Needs, Wants and Unplanned category. Enter the sum of each type of spend for the week you are reviewing.

              This habit helps in 2 ways:


              • You get a chance to look back at the week and retrospect if all the spending you did was necessary. This pushes you to adjust your habits if necessary.
              • How quickly you are approaching your budget limit. You can see both the budget and how much is spent by the end of each week.
              Budgeting monthly review

              Monthly Review:

              At the end of each month, make sure you review your status on your expenditure against the budget.

              It is also the time for you to retrospect and see what went well and what you should be careful about from the next budgeting.

              The monthly review helps you to become a better budgeter!

              Budgeting Monthly review


              I hope you enjoyed the step-by-step budgeting guide.

              Now, I am excited to hear back from you about your thoughts on how you plan to implement the budgeting process.

              Are there any specific ideas that you liked the most?

              Do leave your thoughts in the comments. Right now.

              And don’t forget to get started with your budgeting after you close this guide.

              budgeting summary

              Illustrations by Freepik Storyset


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