How to Budget Money in 5 Steps
Many, or all, of the products featured on this page are from our advertising partners who compensate us when you take certain actions on our website or click to take an action on their website. However, this does not influence our evaluations. Our opinions are our own. Here is a list of our partners and here's how we make money.
Say you have take-home pay of $3,000 a month to pay for housing, food, insurance, health care, debt repayment and, ideally, fun. Covering all that without running out of money can be hard to do and overwhelming to think about, particularly as costs rise.
But budgeting may help.
A budget is a plan for every dollar you have. Whether your income is steady or varies from month to month, a budget helps you organize your expenses, savings goals and other financial obligations into a manageable system that can provide more financial freedom and a less stressful life.
» Learn: What is a budget?
How to budget money
To budget money, follow the five steps below.
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.
» Calculate your take-home income
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.
Get a free, personalized financial plan
powered by Quinn
Step 3. Track your progress
Record your spending, or try tools such as budget apps or budget worksheets. During this step, it’s important to pay attention to where your money is going. If you notice areas where you’re overspending, try to cut those costs. If you’re able to make cuts and have money left over, put it toward debt repayment, savings or another financial priority.
» Track your budget with the free NerdWallet app
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 any emergency fund, investment or retirement accounts you may have
If your income is irregular, set reminders to manually transfer the appropriate amount of money for that paycheck. In either case, 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.
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
One popular budget plan is the 50/30/20 budget. Over the long term, someone who is able to follow these guidelines will have manageable debt, room to indulge occasionally, savings to pay for irregular or unexpected expenses and the ability to 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.
» Dig deeper: 60/30/10 budget
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 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.
