Search for Savings & Loans
The Basics of Creating a Personal Budget: A Step-by-Step Guide
Money Management

The Basics of Creating a Personal Budget: A Step-by-Step Guide

Budgeting is a concept that most people are familiar with but not many people undertake. People like to work out the numbers in their heads. Working numbers in one's head gives the illusion of having control over one's finances while excusing expenditure based on emotional impulsivity.

This modus operandi however undermines our goals, dreams, and ambitions. It is said that if you do not have a goal any road will take you there. Hence, budgeting is a proactive exercise that forces you to set a goal and harness your behaviour and resources to attain the goal.

In this article, you will learn the basics of creating a personal budget.

Understanding the Purpose of a Budget

Budgeting for the sake of budget is a futile activity. Your budgeting expedition might be an emotional undertaking after listening to an inspiring podcast or reading an article that challenges you to budget. 

While this initial motivation is a great starting place, in order to have effective budgeting you will need much more than motivation. You will need discipline. You will need to make sacrifices. Discipline and sacrifices are not the most fun things to do.

Therefore, to create a budget that you will actually follow you need to understand why you are budgeting. The reason for budgeting is mostly so that you can attain a given financial goal. 

But the more pertinent question to ask yourself is, what does achieving the financial goal mean for you? What does it do for you?

For instance, you might be saving to go for a holiday. Going for a holiday might seem impulsive and extravagant, however, if the holiday is a needed mental break that will eventually improve your quality of life, then every moment you stick to the budget you will be choosing your well-being above the momentary impulsivity.

Such a deeper understanding of the purpose of a budget is more sustainable even in the days that the sacrifices take a lot of effort to effect.

So where do you start to create a personal budget?

Read Also: The Ultimate Personal Budgeting Guide

1. Assessing Your Financial Situation

The starting point for any plan (which is what a budget is) is assessment. You want to understand at the moment where things stand. The same goes for your budgeting. 

Assessing your financial situation paints a clear picture of how things are and therefore informs the steps that will follow.

To assess your financial situation analyse how much money you make and most importantly how you spend it. The phrase living hand to mouth is thrown around to describe those who do not make enough money to sustain their consumption. However, enough money is relative. You might be making a million a month and you will be broke by the end of the month if you stuck up your expenses beyond a million a month.

Therefore, analysing your financial situation is crucial so that you can clearly define what enough money means to you. 

Secondly, analysing your financial situation is about studying how you spend your money. What are your expensive commitments? What commitments seem not expensive but they accrue significantly over time? But it also goes deeper to investigate the relevance of given expenses. Most people living hand-to-mouth find that they have a lot of impulsive engagements. You get to ask the importance of these impulsive expenses vis a vis your ultimate financial goal.

Crucially, you also have to analyse the debt obligations that you might have. Every debt comes with an interest. Without paying attention to the debt, the interest can siphon money from your pocket without your knowledge. It is prudent that you take that into consideration.

Read Also: Budgeting 101: What to Include in Your Budget

2. Categorising Your Expenses

After analysing your financial situation, now you have a grasp of how much you make, where you spend the money, and how you are servicing your debt.

Categorizing your expenses is a proactive step that forces you to put value to your expenditure. While categorising you will have to ask yourself the question, is this a need or a want. Needs are necessities and wants are nice-to-haves. You will also determine how much you want to save and how much to commit to service your debt.

While categorising your expenses you can qualify them into the following four buckets.

Read Also: Spending 101: Skills to Keep Your Expenses in Check


Necessities are your essentials. The expenses that you cannot go about your life without. These expenses include rest, utility bills, transport to work, food, clothing, and such. These are the absolute necessities for your life to run smoothly.

While the necessities get the most priority when it comes to allocation of funds, you have to ask a question of not only, what is my rent, but the question of is my rent too expensive. Before justifying the expenditure of rent, you have to ensure that you do not overcommit to the needs.


Wants are the nice-to-haves. These are expenses that you can go about life without, however, they are nice expenses that make you enjoy life just a little more.

Remember when we talked about discipline and sacrifices? When push comes to shove, the wants are the first to go. These are the first expenses to slash from your expenditure. This might include vacations, nights out with friends, that extra handbag, or even that latest model phone. 

Read Also: Needs Vs Wants: A Budgeting Dilemma that Could be Keeping You Poor”?


Most people do not think of savings as an expenditure. Savings are perceived to be what is left after we have spent on our needs and wants. Unfortunately, that does not leave much for saving.

Savings is a proactive practice. Financial experts advise that you save before you spend. The money portion that should be your savings should be the first to be set aside before taking on other expenses.

Think about it like this. By saving first you are prioritising your future above instant gratification. If you are able to do this consistently you empower your future self.

Debt Repayment

Debt repayment just like savings, should be a priority. The savings you set aside have the potential to make money for you through interest. On the other hand, the debt that you have will take money from your pocket over time.

Therefore, it is essential that you have a debt repayment scheme to prevent you from defaulting or from the loan becoming too expensive.

If you are thinking of going into debt, Money254 helps you find the best debt partner that suits your financial needs.

3. Setting Realistic Budgeting Goals

At this point, you understand the purpose of your budget, you have assessed your financial situation and you have categorised the expenses. At this stage, you start looking into the future. What financial goals do you have?

Your financial goals can be as basic or epic as you want. It depends on what you value most in life.

For instance, a goal for many people is to save during their career years, buy land in a rural area, build a decent house, and retire there. For the younger generation that might be traveling the world.

Whatever goal you choose you should ensure it aligns with your values. 

Furthermore, you can also have short-term goals and long-term goals. Your long-term and short-term goals have to be in harmony in order to make a congruent budget. For instance, if you value family, the short-term goals could be affording your kids school fees but the long-term goal is buying land and settling there. These two goals although different align because they are both about your family values. At some point, you might have to prioritise school fees but run the two goals parallel. 

You can use the SMART model to make sure your goals are realistic.

Read Also: Money Mastery: How to Set & Actually Achieve Your Financial Goals


A specific goal is one that is clearly defined. You want to remove all ambiguity from your goals. For instance, I once met a poet (Cykam Storyteller) hawking sweets in the matatus in order to buy himself a camera to shoot his videos. On his shirt, he had a tag that said the amount of money he had raised so far. The day I met him, he was at 49%. We kept in touch and a few months later, he bought his camera.

Cykam’s goal was specific. He knew the camera he wanted and how much it cost. That was a specific goal.


Measuring is essential because it helps you track your progress. Cykam quantified it in percentages. Every day when he goes on the matatus to sell sweets he updates his progress. Being able to track the progress of a goal makes it more likely to be attained.


The goal you set should be attainable. Although unicorn stories exist they are very rare. It is therefore realistic not to bet against a one-in-a-million chance. It is better to have attainable goals. Cykam’s goal was attainable. In a conversation with him, he told me that he had factored in how much he would make from making sweets and the amount of work that would be needed, and for him it was a plausible goal.


Your goal should also be relevant to you. It should be a goal that advances your life or improves it. Cykam is a spoken word artist. In today's world, video is king. So he wanted to make videos for his spoken word pieces. So he invested in his own camera.


Goals have to be time-bound, otherwise, it becomes easy to postpone them forever. Cykam had a specific date that he expected to attain his goal. In the end, it took him a little longer, which is a reality of many goals, but having the time constraint makes one proactive to attain the goal. 

Since buying his camera, Cykam has produced some amazing spoken word pieces. If you like spoken word you can check him out.

4. Staying Disciplined and Motivated

After all the understanding, analysing, assessing, categorising, and setting of goals, the hardest part comes in, the execution. 

It is all nice to plan but if you never do it the plan is useless. The relevance of a budget is seen after you have done all the budget dictates. Doing that requires discipline and motivation. 

Motivation gets you excited to come up with a budget but discipline is what makes you stick to the budget. 

Discipline is like a muscle, you build it. At first, it will be difficult to stick to a budget but if you do it over time, it will get easier and easier.

5. Budget Review

Change is the only constant in life. While having a budget tries to moderate the drastic changes sometimes change is inevitable. Your income might increase significantly or reduce, when such tectonic changes happen it is a good idea to review your budget.

Also after you achieve some set goals that you had, you have to review your budget and focus on different goals. Also, sometimes priorities change and certain goals might become irrelevant, therefore a budget review is imminent.

Read Also: 8 Reasons Why Your Budget Isn’t Working

Wrapping Up

Having a budget and sticking to it might seem an arduous task, however, it is the best gift you can give yourself. A budget, although limited at the moment, is the passport to freedom. It is the passport to living your dreams.

Living according to your budget gives you the peace of mind you need today but it also helps ensure that peace of mind in the future.

No items found.

Stephen Kimani aka KIMSpeaks is a thought leader, speaker, and writer. He is also the Founder of Living the DREAM. He is passionate about learning and teaching ideas that empower people to improve the quality of their lives. You can connect with Kimani on LinkedIn.

Get the Money254 App and don't miss out on the next article.

Join 1.5M Kenyans using Money254 to find better loans, savings accounts, and money tips today.

Get it on Google Play
A person holds the Money254 App in their hand.

Welcome to Money254 - your simple way to compare loans in Kenya online.

Money 254 is a new platform focused on helping you make more out of the money you have. We've created a simple, fast and secure way to find and compare financial products that best match your needs. All of the information shown is from products available at established financial institutions that our team of experts has tirelessly collected.

Download the new Money254 App and don’t miss out on the next article.

Join 1.5M Kenyans using Money254 to find better loans, savings accounts, and money tips today.
Get it on Google Play

Learn more about Personal Loans available in Kenya on Money254

Money 254 is a new platform focused on helping you make more out of the money you have. We've created a simple, fast and secure way to find and compare financial products that best match your needs. All of the information shown is from products available at established financial institutions that our team of experts has tirelessly collected.

Instantly search loan products from established providers in Kenya and compare on the terms that matter most to you.
Find the best Personal Loans for me

Don't miss another article - download the new Money254 App Today

Get it on Google Play
Download the Money254 app on Google Playstore

Sign up for our newsletter and get weekly money tips to your inbox.

Get updates from the Money254 team on financial news and new Money254 features.