How to Budget Money in 5 Steps

Divide your income among needs, wants, savings and debt repayment, using the 50/30/20 budget.

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Updated · 5 min read
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Written by Lauren Schwahn
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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. Using your take-home pay as a starting point, a budget organizes your expenses, savings goals and other financial obligations into a manageable system that can provide more financial freedom and a less stressful life.

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. Figure out your net income using our nifty calculator.

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. The budget you choose doesn’t have to last forever.

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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.

Many experts recommend you try to build up several months of bare-bones living expenses. We suggest you start with an emergency fund of at least $500 — enough to cover small emergencies and repairs — and build from there.

You can’t get out of debt without a way to avoid more debt every time something unexpected happens. And you’ll sleep better knowing you have a financial cushion.

Get the easy money first. For most people, that means tax-advantaged accounts such as a 401(k). If your employer offers a match, consider contributing at least enough to grab the maximum. It's free money.

Why do we make capturing an employer match a higher priority than debt? Because you won’t get another chance this big at free money, tax breaks and compound interest. Ultimately, you have a better shot at building wealth by getting in the habit of regular long-term savings.

You don’t get a second chance at capturing the power of compound interest. Every $1,000 you don’t put away when you’re in your 20s could be $20,000 less you have at retirement.

If you have any extra cash available, go after the toxic debt in your life. High-interest credit card debt, personal and payday loans, title loans and rent-to-own payments all carry interest rates so high that you end up repaying two or three times what you borrowed.

If either of the following situations applies to you, investigate options for debt relief, which can include bankruptcy or debt management plans.

    • You can't repay your unsecured debt — credit cards, medical bills, personal loans — within five years, even with drastic spending cuts.

    • Your total unsecured debt equals half or more of your gross income.

  • Once you’ve knocked off any toxic debt, the next task is to get yourself on track for retirement. Financial professionals suggest saving 15% of your gross income for retirement, and; that includes your company match, if there is one.

    If you’re young, consider funding a Roth individual retirement account after you capture the company match. Once you hit the contribution limit on the IRA, consider returning to your 401(k) and maximize your contribution there.

    Regular contributions can help you build up three to six months' worth of essential living expenses — not your full budget, just the must-pay basics. You shouldn’t expect steady progress because emergencies happen, and that's when you should pull money from this fund. Just focus on replacing what you use and increasing your savings over time.

    These are payments beyond the minimum required to pay off your remaining debt.

    If you’ve already paid off your most toxic debt, what’s left is probably lower-rate, often tax-deductible debt (such as your mortgage). Tackle these when the goals listed above are covered.

    Any wiggle room you have here comes from the money available for wants or from saving on your necessities, not your emergency fund and retirement savings.

    Congratulations! You’re in a great position — a really great position — if you’ve built an emergency fund, paid off toxic debt and are socking away 15% toward a retirement nest egg. You’ve built a habit of saving that gives you immense financial flexibility. Don’t give up now. Consider saving for irregular expenses that aren’t emergencies, such as a new roof or your next car. Those expenses will come no matter what, and it’s better to save for them than borrow. You may also choose to use any disposable income you have to build wealth faster by putting more money in your retirement pot.

    To really boost your savings, consider a high-yield savings account. These accounts tend to pay higher rates than traditional savings accounts. You can organize your savings into buckets — emergencies, car repairs and even your next vacation. Have a savings goal that’s falling behind? Redirect those monthly interest payments to get that bucket up to speed. [Quick tip: Some banks will automatically redirect your monthly interest to the bucket of your choice for a hands off approach.] The more money you save, the bigger those monthly interest payments will be. A total win-win.

    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 necessities — 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. Or, a switch to the 60/30/10 budget might be a better fit. Switching your budgeting model isn't a sign of failure. Remember, a budget should be realistic for your location and life circumstances.

    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 a less expensive car insurance option. Those money moves create breathing room in your budget.

    Leave 30% of your income for wants

    Separating wants from needs can be difficult. In general, 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 for unexpected or unanticipated costs 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.

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