How to Budget Money in 5 Steps
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If you have take-home pay of, say, $3,000 a month, how can you pay for housing, food, insurance, health care, debt repayment and fun without running out of money? That’s a lot to cover with a limited amount.
The answer is to make a budget.
What is a budget? A budget is a plan for every dollar you have. It represents more financial freedom and a life with much less stress.
How to budget money
It’s easy to get overwhelmed by the many details included in the budgeting process. Here are five steps to follow.
Step 1. Figure out your after-tax income
If you get a regular paycheck, the amount you receive is probably your after-tax income, but if you have automatic deductions for a 401(k), savings, and health and life insurance, add those back in to give yourself a true picture of your savings and expenditures. If you have other types of money coming in — such as from side gigs — subtract anything that reduces that income, such as taxes and business expenses.
Step 2. Choose a budgeting system
A budgeting system is a framework for how you budget. Everyone has different habits, personality types and approaches to managing money, and there are systems that can fit your lifestyle. Any budget must cover all of your needs, some of your wants and — this is key — savings for emergencies and the future. Budgeting system examples include the envelope system, the zero-based budget, and the 50/30/20 budget, which we’ll discuss more below.
Step 3. Track your progress
Record your spending or use online budgeting and savings tools. During this step, it’s important to pay attention to where your money is going. If you notice areas where you’re overspending, consider cutting those costs. The money you notice slipping through the cracks could go toward debt repayment, savings or another financial priority.
Step 4. Automate your savings
Automate as much as possible so the money you’ve allocated for a specific purpose gets there with minimal effort on your part. If your employer permits, set up automatic payments from your paycheck to your emergency savings, investment and retirement accounts. An accountability partner or online support group can help, so that you're held accountable for choices that don't fit the budget.
Step 5. Practice budget management
Your income, expenses and priorities will change over time, so manage your budget by revisiting it regularly, perhaps once a quarter. If you find that the initial budgeting system you choose isn’t working for you, consider trying a different strategy.
Determine priorities in your budget
When budgeting, it can be difficult to determine which items are most urgent. Should you prioritize your credit card debt, student loan repayments or retirement savings? Here is a list of potential priorities from most to least urgent.
Try a simple budgeting plan
We recommend the popular 50/30/20 budget to maximize your money. Over the long term, someone who follows these guidelines will have manageable debt, room to indulge occasionally, and savings to pay irregular or unexpected expenses and retire comfortably.
Allow up to 50% of your income for needs
Your needs — about 50% of your after-tax income — should include:
Groceries.
Housing.
Basic utilities.
Transportation.
Insurance.
Minimum loan and credit card payments. Anything beyond the minimum goes into the savings and debt repayment category.
Child care or other expenses you need so you can work.
If your absolute essentials overshoot the 50% mark, you may need to dip into the “wants” portion of your budget for a while. It’s not the end of the world, but you'll have to adjust your spending.
Even if your necessities fall under the 50% cap, revisiting these fixed expenses occasionally is smart. You may find a better cell phone plan, an opportunity to refinance your mortgage or an opportunity for less expensive car insurance. That leaves you more to work with elsewhere.
Leave 30% of your income for wants
Separating wants from needs can be difficult. In general, though, needs are essential for you to live and work. Typical wants include dinners out, gifts, travel and entertainment.
It’s not always easy to decide. Are restorative spa visits (including tips for a massage) a want or a need? How about organic groceries? Decisions vary from person to person.
If you're eager to get out of debt as fast as you can, you may decide your wants can wait until you have some savings or your debts are under control. But your budget shouldn't be so austere that you can never buy anything just for fun.
Every budget needs wiggle room — maybe you forgot about an expense or one was bigger than you anticipated — and some money to spend as you wish. If there's no money for fun, you'll be less likely to stick with your budget.
Commit 20% of your income to savings and debt paydown
Use 20% of your after-tax income to put something away for the unexpected, save for the future and pay off debt balances (paying more than minimums). Make sure you think of the bigger financial picture; that may mean two-stepping between savings and debt repayment to accomplish your most pressing goals.
Frequently Asked Questions
How do you make a budget spreadsheet?
Start by determining your take-home (net) income, then take a pulse on your current spending. Finally, apply the 50/30/20 budget principles: 50% toward needs, 30% toward wants and 20% toward savings and debt repayment.
How do you keep a budget?
The key to keeping a budget is to track your spending on a regular basis so you can get an accurate picture of where your money is going and where you’d like it to go instead. Here’s how to get started: 1. Check your account statements. 2. Categorize your expenses. 3. Keep your tracking consistent. 4. Explore other options. 5. Identify room for change. Free online spreadsheets and templates can make budgeting easier.
How do you figure out a budget?
Start with a financial self-assessment. Once you know where you stand and what you hope to accomplish, pick a budgeting system that works for you. We recommend the 50/30/20 system, which splits your income across three major categories: 50% goes to necessities, 30% to wants and 20% to savings and debt repayment.
Ready to learn more about budgeting? Watch this video.