- The tips in this ultimate guide to budgeting are a great way to stay on top of your finances and achieve your short-term and long-term goals.
- Making personal goals and keeping them in sight will help you create and maintain a sustainable budget.
- The 50/30/20 budget plan provides a simple framework that can accomplish a balanced budget in unique ways that’s suitable for different types of lifestyles and goals.
So you’re finally ready to sit down and hammer out a budget. You may have been putting it off for quite some time, or you might be ready to start seriously saving up for your financial goals. You’ve come to the right place — our ultimate guide to budgeting will walk you through the practical steps of creating a budget that makes your life easier.
What Is a Budget?
The common budget, also known as a household budget, is a spending plan that keeps your finances in check. With a budget, you have a monthly total that you’re not to spend beyond. Many budgets will even include category breakdowns, such as:
- Savings Goals
These categories can vary from person-to-person, but the general idea is to have categories that fit your regular spending habits, irregular expenses, and goals you’re hoping to save for.
Ultimately a monthly budget serves to keep your personal finances in check, while also helping you achieve financial goals and savings goals. Lastly, it serves to help you build a better future for you and your family. In short, the benefits of budgeting can have a lifelong impact. Yet, 37% of people still don’t have a budget.
Let’s tackle how to make a budget so you can avoid being a part of that number and be more savvy with your money.
The Ultimate Guide to Budgeting, Step-by-Step
Budgets can be as brief or in-depth as you want, but generally a more in-depth one provides you with more information. So, let’s get this ultimate guide to budgeting started with some tips and necessary steps to make your first budget really shine.
1. Ask Yourself Why You Want a Budget
Before you start budgeting or plotting out a budget, you need to ask yourself why you want to budget. If you simply want to be more responsible and financially stable, that’s great. But it can be helpful to have very specific goals as well. Perhaps you want to save up for a new car? Or maybe you’re looking to grow your family and a larger house is on the horizon? Or you’re looking to boost your retirement savings. Your reason for budgeting can be anything, but whatever it is, take note of your “why” — such as a feeling of success, security for your family, peace of mind for your future.
Even better, write out your goal or goals and put them somewhere you’ll be reminded of them. This will ensure your reason to budget is always top of mind.
2. Review What You Spend Money On
Pull up or download your bank statement and credit card bills, and look for recurring monthly expenses. This often includes things like utilities, streaming services, health insurance, student loans or other loan payments, car payments, cell phone bills, contributions to retirement accounts, and general living expenses.
Essentially you need to get an idea of how much you consistently spend each month. Things like eating out or traveling can vary, so look at a few months and average out what you spend on these miscellaneous wants and needs to get a number for your budget. It doesn’t have to be perfect, but you want to be as accurate as possible.
Note any irregular or unexpected expenses here as well. Look through your past few months of bank statements and see where you’ve spent money, what kinds of odd or one-off purchases you’ve made, and so on. If you see any patterns, take note and build those into your budget. If there isn’t a pattern, make an estimate of how much you spend on one-off things.
3. Consider Which Services You Don’t Need
While this step isn’t absolutely necessary for the ultimate guide to budgeting, it’s a good one to consider.
After reviewing your expenses, question every service you’re paying for. It’s easy to subscribe to another streaming service because it’s “only $5 per month,” but those expenses add up quickly. Look at your cell usage and decide if you really need an unlimited data plan or if you could get by with something smaller. If you have a gym membership and haven’t gone in months, consider cancelling it and opting to jog or buy some weights for working out at home. There’s often a cheaper option, so hunt around before settling.
Again, this money might not look like much, but any money saved can be put toward your emergency fund or retirement savings, or contributed to something you really need, debt payments, and so on.
4. Total Up Your Income
Next up in the ultimate guide to budgeting, it’s time to see what you have to work with. Examine your take-home pay and other monthly income streams, as well as any extra money that may come in through the occasional freelance job, and total it up. Ignore any money in your savings account, as we only want to work with monthly sources of income here.
Again, look at your take-home pay, not the gross income amount, as we want to see how much money you have to budget with. Money that hasn’t been taxed yet won’t give you an accurate idea. If you do have irregular income through something like freelance, total it up over the past few months to find an average and note an estimated after-tax amount.
5. Determine Your Savings Amount
It’s time to think back on those goals you set at the beginning. Beyond your usual expenses, think about how much you want to save toward each goal and break it up into monthly pieces. For example, let’s say you want to save $5,000 in 12 months for a car down payment. That comes out to roughly $416 each month. Take note of that, and any other goal amounts you have.
If you’re looking at a more general goal, like building a healthy retirement account, it’s still a good idea to assign an amount to it. Instead of “build a healthy retirement account,” set a goal like, “deposit $500 into an IRA every month.” This will give you a tangible amount to work with and make budgeting easier. (More on savings goals in your budget below.)
6. Choose Your Budget Type
Look at your expense totals from step two, then compare it to your income from step four. See how much money you absolutely have to spend each month and subtract that from your total income for the month. Now take whatever’s leftover and write that down. If you have a negative number, meaning expenses are higher than income, note that too.
It’s time to pick your budget type. While there are many types of budgets, we like the 50/30/20 budget plan for many reasons.
The 50/30/20 Budget
With this budget type, you save 50% of your available money for needs. This includes groceries, rent, and debt repayment minimums. Next set aside 30% for wants, like entertainment, shopping, travel, or an expensive night out at the bar. Then, 20% goes into your savings, whether that’s towards an emergency fund, accelerated debt payments, retirement accounts or other savings goal.
We like this way of budgeting because it clearly outlines the major categories for your budget, without dictating how much each line item should be. As long as your spending falls in the ballpark of 50% for needs, 30% for wants and 20% for savings (and extra debt payments), your spending in each of the sub-categories is pretty much your call.
We also want to emphasize the 20% allocated towards savings. Even though it is the last number mentioned, we suggest you set aside that amount before everything else. If you “pay yourself first” as a habit, the other 80% of your income can be distributed as you wish between needs and wants. This is a simple yet powerful financial principle to live by, and all within your power to follow.
Other Budget Plans to Consider
The zero-based budget is an aggressive form of budgeting that has you assign every single dollar of your income to something. This means all of your needs and wants, as well as your goals or repayments. If you have “leftover” money, you should then assign it to something so you continue to keep your available cash at zero. This budget can be a great way to catch up on debt, but its aggressive nature makes it difficult to adapt to everyone’s lifestyle.
Another method is the “Envelope Budget” which is about as detailed as you can get but good for those who really need a sense of where their money is going. Once you’ve decided how much you are going to spend in each category each month, you create envelopes (yes, the paper kind) for each one and insert cash (yes, also the paper kind) that’s allocated to that category.
Once the cash is gone for the month, that’s it for spending in that category. While envelopes might not make sense for large expenses like rent or auto loan payments, they might be practical for those spending categories which have gotten out of control. If you’ve habitually overspent on dining out or shopping, for example, the envelope budget method might be the most effective way to exercise limits.
“Values-based” budgeting might also be right for you if you have the discipline to live within your income and also set aside money for your savings goals. With this plan, which could be considered the “anti-budget,” you identify your personal values and examine each expense and cash outflow against these to determine if your money is going where you intend it to go. The flexibility is appealing, and we also believe it’s smart to be mindful of your money. This method’s lack of a system, however, keeps you from being able to track your progress.
Your first budget may be a little more strict than it needs to be, but that’s better than having a generous budget that sees you missing your goals. No matter the budget type you choose, make sure you have an emergency fund for unexpected costs, and be as mindful of your spending as possible.
7. Draft Your Budget (or Use a Tool)
It’s now time to draft your actual budget. You can use a pen and paper, but there are also numerous tools and budgeting apps that can make budgeting much easier. If you want to go the manual route, consider using Microsoft Excel or Google Sheets instead of paper, as this will ensure you have a digital copy that can’t be thrown away or lost. (As easily, at least.)
8. Have a Regular Review Date
The next step in the ultimate guide to budgeting is to set a date to review your budget to make sure you were on target. Find a day, ideally in the middle of the month, where you (and anyone else involved) can compare how your spending and savings stacked up against your goals. Make adjustments to your spending as needed if you feel you’re off target. Similarly, if you realize you’re not making enough money or conversely, saving enough money, consider adjusting your actual budget. Earning more money is always a worthy consideration.
Yes, you want to meet your long-term goals, but that only happens if your budget is working in the short-term as well. A review date will help you determine if you’re tracking with the amounts you intend to spend and save. Getting your spending and saving in line with the 50/30/20 rule will likely take time, so be patient with yourself. With the intention and practice, you’ll get there.
9. Keep Your Eyes on the Prize
Your personal budget is exactly that, personal. Remind yourself frequently of why you’re saving. Being debt-free or striving to boost your credit score is great, but it’s easy to lose sight of those goals in the hustle and bustle of everyday life. Being mindful of your goals at all times will keep you from straying.
Budgeting for a Better You
Remember to take your time when budgeting, be as thorough as possible, and measure your progress. For added accountability, loop in a trusted relative or friend to budget with you and have a budgeting buddy. (You might even motivate each other.)
Budgeting can take a good amount of time and planning, but the process of knowing where your money goes is a cornerstone of managing your finances. Money comes and goes, but healthy financial habits like budgeting turn into something greater than any purchase: financial peace of mind that you’re proud to have achieved on your own.