diff --git a/.envrc.example b/.envrc.example
new file mode 100644
index 0000000..5307aee
--- /dev/null
+++ b/.envrc.example
@@ -0,0 +1,2 @@
+use flake
+export DIRENV_ACTIVE=1 # force direnv to always activate by adding a dummy environment variable
diff --git a/docs/setup.md b/docs/setup.md
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--- /dev/null
+++ b/docs/setup.md
@@ -0,0 +1,28 @@
+# Project Setup
+
+1. Copy `.envrc.example` to `.envrc`.
+2. Install [nix](https://nixos.org/download/).
+3. Install [direnv](https://direnv.net/) and [nix-direnv](https://github.com/nix-community/nix-direnv).
+4. Run `direnv allow` at project root. This is to automatically load the environment when you `cd` into the project directory in the terminal in the future.
+5. Run `which python` to verify that the Python interpreter is from the nix environment.
+
+    ```shell
+    $ which python
+    /nix/store/9l232zbyi3nisqn9s3li4imyv37753vc-python3-3.11.9-env/bin/python
+    ```
+
+    Path should look similar to the above from `/nix/store`. This confirms that you are using the correct Python interpreter.
+
+6. Run `python -mpytest` to execute all tests.
+
+If you are able to run all tests, you are ready to go!
+
+## VS Code
+
+1. For intellisense in VS Code, add result of `which python` to your `.vscode/settings.json`:
+
+    ```json
+    {
+        "python.defaultInterpreterPath": "output of `which python`"
+    }
+    ```