Here's how we create our spending plan. Caveat, there is no "right" way to do this, this is just what works for us and our brains. It isn't a perfect solution, but it gets us to the point where we have a plan for every dollar that comes our way and then real-time tracking how we are doing against that plan.
1. track spending. I keep track of yearly spending in a spreadsheet tab, one column per year. I can see macro-level trends and averages over multiple years. I have about 3-4 years of pretty accurate spending data right now. You can look back with Mint Trends to see spending in the various categories for previous years.
I break out all the categories in a way that makes sense for us. Each of these categories that we spent money on then gets mapped to a corresponding budget line item in the next step.
2. Allocate your income to the buckets of spending. This is the complicated step.
Take your the income you have coming in (paychecks) and allocate it based on your historical spending track record and savings goals, with an eye on how much money you have left. Each spending category takes away money for everything else. I use google sheets for this. I have sections for pre-tax expenses/savings (health ins, etc), post-tax savings, and regular expenses.
I put in all of the more rigid/inflexible spending categories in first. This would be rent, loan payments, maxing our 401k and IRA contributions, transfers to our emergency fund, groceries, sinking funds for car maintenance, etc. The expenses are based on our pretty stable historical averages (in the case of groceries and car maintanence, for example) or knowns (like how much our rent is).
Then I fill in all the "wants" with our historical averages too. But because these are wants, they can be a bit more flexible. As an example, we spent $2748 on restaurants in 2016 and $2702 in 2017. That is pretty darn stable, and we are pretty happy with this level but it could be tightened up a tiiiinnyy bit, so I'm going to set the restaurant budget for 2018 at $2700 (this is yearly, so it breaks out to $225 per month). This is mostly based on gut feeling, I guess? (So far this year, we are well under our average spending, so I don't even think we will hit $2400 total in this category. So this new data point would be entered at the end of the year and then I would do a rolling average to determine our next spending plan for this category)
This "wants" section includes things we have control over like gifts, travel, restaurants, entertainment, sports, clothing, alcohol, and a misc category that is historically down to ~$3 per year, but even though it is small, I still account for it!
All this time I'm keeping an eye on my little count-down section of my spending plan sheet, seeing how much I have left over each month after all this. We follow the Investment Order that floats around on the forum, so after maxing our IRAs, HSA, 401ks, and then our holistic expenses, I know how much is left over each month to put toward a taxable brokerage account. That "taxable brokerage" line item is the one I fill out last, with whatever is left over.
My spending plan is pretty comprehensive, it includes 35 line items on it. Any little thing that has been spent on in the last 3 years is accounted for in this spending plan, because if we spent on it once, we likely will again. As time goes on, more data points will make this more and more accurate.
However, if you don't have quite as big of a gap as we do, you might be getting close to being into the red. Do you need to make any adjustments? This is where you can use your best judgement on what tradeoffs are reasonable given your baseline comfort level. Can you reasonably cut $20, $50, $150 from a category? You know yourself best, would your family actually be disciplined enough to adhere to the slight change? As a LAST resort, you might consider scaling back brokerage or 401k/IRA contributions (based on the investment order) to give yourselves a bit of breathing room.
On this step, I usually spend at least a week each year filling in the details and running numbers and making small tweaks to make both my expenses and my goals work without going over. At the end, this plan is essentially an ideal budget, but because all the numbers are based on your own spending history and you made reasonable, attainable tradeoffs, it is really more of a solid spending plan than a pie-in-the-sky, unrealistic budget.
If anything changes during the year (raises, changes in rent, etc), I also go back and review all the numbers again, and make any adjustments needed.
3. Recreate this spending plan in Mint using their budgeting feature. Then you can see how you are doing each month and make real-time adjustments to your spending if you are seeing things creeping up. I have most line items set to rollover for each month so then we naturally spend less on those categories the next.
My DH and I have a monthly review to see how we did on our spending plan that month and commit to any changes we want in order to help us meet our goals. I also check Mint weekly, if not daily, so I'm pretty on top of our real-time spending. DH is less so, but then all I have to do is mention "hey, we're running a bit over on our restaurant plan this month" and then we just naturally scale back a bit.