How to Start Your Year-End Budget in 5 Simple Steps

Budgets are a vital part of balancing your spending and making progress towards your goals. We all know they are important — but that doesn’t mean making them is a breeze. Now that we’re nearing the close of 2020, it’s time to start your budget for next year. 

If we’re being honest, your 2020 goals were likely derailed by the pandemic. You likely made some adjustments and might have taken on some extra debt in the process. But the fact is, you can’t create an effective budget without first identifying your roadblocks. Use these steps to create your 2021 budget

1. Calculate your income

To start things off, you need to know your total income (gross income from all your sources). If you freelance or have a variable income, admittedly, this might not be easy. In this case, you can use an average. But, you might want to create a tighter budget to account for this gray area. If you have additional forms of income from a side hustle or source like child support, make sure you include it here. It’s worth emphasizing that your gross income will typically be a larger number, compared to your net income — which accounts for funds left after deductions or withholdings. 

2. Look at your bills and balances

After calculating exactly how much money you make, you’ll need to lay out all of your bills and balances. We know this is probably the last thing you want to do, especially after 2020. Unfortunately, it’s probably the most important part of creating your budget. Collect your bank statements and bills to evaluate your balances and due dates. It doesn’t matter if you use the latest budgeting software, an excel sheet or a pad and paper, whatever it takes.

[ Read: The Best Savings Accounts in 2021

When making a list of your monthly expenses, it might help to break them down by fixed or variable expenses.

  • Fixed: These expenses are the same amount each time, like your mortgage, rent or student loan payments.
  • Variable: This is where it gets tricky — variable expenses can change from month to month — entertainment, food and travel expenses. 

3. Find opportunities to cut spending

Now that you’ve laid it all out and you know what percentage of your income is promised to bills, you’ll be able to find the spots you can pull back. You’ll need to be both realistic and a little harsh at this stage. Planning an inflated budget won’t help you manage your spending or achieve the goals you set for yourself. 

[ From Trent: How to Create and Customize Your 2021 Financial Goals ]

For example, take-out is easy and sometimes a better option than going to the grocery store during the pandemic. But it’s not good for your wallet. The amount of money people spend on food has increased since 2019, so consider cheap-and-easy meals that save you time if you have a bloated budget. 

Another pitfall many see in their spending is their subscriptions. Did you sign up for any free trials and forget to cancel last year? Evaluate your monthly subscriptions and see which ones you aren’t using. Charges like this can sneak by, sometimes without you even noticing –– but it adds up pretty quickly. After eliminating frivolous spending, you can redirect that money directly into your savings. 

4. Don’t forget your emergency fund

So you have the bare bones of your budget laid out. You have found the areas you can cut back on and know how much extra money you’ll have each month. Now you need to decide what to do with it. 

If 2020 has taught us anything, it is the necessity of building an emergency fund. This is not an area you want to overlook. If you’ve taken a detailed look at your expenses and what you spend, you’ll have an easier time finding the money to put in your emergency fund each month. You never know what could come up over the next year. It’s better to prepare now rather than scramble later. A little planning now will help you avoid predatory options like payday loans or cash advances. 

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    5. Plan for your taxes

    Taxes will be a little more complicated this year, especially for the millions of Americans who received unemployment benefits. Unless you opted into having taxes being withheld from your payments, you’ll see a larger tax bill for 2020. Not all states will tax these benefits, though federal taxes will be due. 

    [ Read: Income Tax Guide for 2020 ]

    You’ll also need to look at your 401(k) or IRA contributions for the year. Contributing to these accounts will lower your taxable income. Any charitable donations you have made will also need to be accounted for, as they often mean additional deductions on your taxes. A little math now and a quick could help you maximize your write-offs.

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    Taylor Leamey

    Personal Finance Reporter

    Taylor Leamey is a personal finance reporter at The Simple Dollar who specializes in personal loans, student loans, mortgages, renters, and financial policy. Her reporting has also been featured at,,,, and elsewhere.

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    • Andrea Perez
      Andrea Perez
      Personal Finance Editor

      Andrea Perez is an editor at The Simple Dollar who leads our news and opinion coverage. She specializes in financial policy, banking, and investing.