Learning how to make a budget makes you more conscious of your money.Continually striving to reach your goals drastically increases your chances of getting there, even if you stumble sometimes. Re-evaluate whenever necessary, but don’t give up. You can do this!
This guide is going to walk you through, step by step, how to make a budget that you can stick to it.
You’ve got money goals. Whether you want to get out of debt, save for retirement, or afford that luxury vacation in Europe, there is one thing you know you have to do:
Get control of your spending.
Creating a budget doesn’t have to be scary or overly restrictive. A reasonable budget is flexible! It knows that your life is ever-changing and helps you prepare for that reality. The only requirement of a reasonable budget is that it helps you get conscious of your spending — and live within your means.
Here’s how to make a budget that works for you so that you can stress a little bit less about money.
1 How to Make a Budget Plan
2 Decide How You’ll Track Things
3 Figure Out Your Take-Home Pay Income
4 See Where You Are Currently Spending
5 Set Your Priorities
6 Track Your Progress
7 Re-Evaluate and Make Adjustments
Step 1: How to Make a Budget Plan
50/30/20 Budgeting Method
The most straightforward budget rule, the 50/30/20 method, is indifferent to your exact spending on electricity versus your cell phone bill this month. All that matters is your spending stays within three main categories: Needs: 50%, Wants: 30%, Savings: 20%.
The benefit of the 50/30/20 rule is that no one category is expected to be static. The composition of spending can be different every month. But as long as your expense fits into the limits set by the broad categories, you’ll continue moving towards your goals.
This method is the preferred method of budgeting. It is simple yet powerful. You are always saving for the future, but you don’t get bogged down in the details.
Step 2: Decide How You’ll Track Things
We are creating a budget once it won’t change your financial life. To have an impact, you need to continue budgeting consistently. Which means we need a way to track your budget.
Especially for beginners, writing out expenses has the benefit of making you carefully consider where you stand, in a way that more automated budget systems don’t.
Use a Budget App to help you track your new budget.
Let’s get to work.
Step 3: Figure Out Your Take-Home Pay Income
You can’t determine your budget until you know how much you have to spend.
To figure out how much you have available to spend each month, you need to determine your take-home pay income. This is the amount that comes in on your paychecks and that you have available to spend.
Add up all your sources of income in a given month, including your job and passive income. This income source is your base, excluding the profit from trading.
Step 4: See Where You Are Currently Spending
Hold on tight. It’s about to get real.
Before you can finish your budget, you have to reflect on where your money is going. And if you’re starting a budget because you know you’ve been overspending, this can be tough. Just remember not to beat yourself up for past spending. You’re making positive steps to be more financially responsible. That’s all that matters!
Review your last two to four months of expenses and break them down into spending categories. Look at bank and credit card statements to help you get a sense of where you are at. In places where you use cash, try to make the best guess at your spending. Also, make a note of any minimum payments on debt, as that also has a white-knuckled claim on your money.
Have your list of categories, along with what you are spending on average, on hand. Now you can build your 50/30/20 buckets.
Allocate 50% of Your Income to Needs
Your most significant and crucial budget category is needs. But what are your needs?
Your Needs are comprised of living expenses and essentials. Items like your rent or mortgage, utilities, home and insurance. These are expenses that you can’t forgo without a significant inconvenience. (Your subscription services and yoga classes don’t count.)
You’ll also want to include any minimum payments on debt. These are the required expenses and should be treated as “needs” instead of debt repayment.
Make a list of all the items in your needs list with their associated expenses. If the total is more than 50% of your income calculated in Step 3, find places to cut. If you can’t get to 50%, the overage will have to dip into your 30% “wants” budget for a while.
Allocate 20% of Your Income to Debt Repayment and Savings
After needs, the 50/30/20 budgeting method prioritizes savings. You need to save for your future every single month.
Calculate 20% of your monthly take-home pay income from Step 3. If you aren’t a math whiz, open up your phone and multiply your income by 0.2. This is the amount you need to contribute to saving money in your emergency fund or retirement accounts.
However, if you still have debt, you can also include extra principal payments in this 20%. Getting out of debt is an investment in your future.
Allocate 30% of Your Income to Wants
What is left over after your spending on “Needs” and “Saving” is the maximum you can spend on wants. This is your quality of life spending, like your cell phone’s data plan, date night, Chinese take-out, and new clothes.
You’ll want to reflect on the spending categories you compiled earlier from your last few months of spending. What items are left after removing the needs? Does the sum fit in the remaining 30% of your budget? And if not, where can you cut?
Remember that you also need to set aside cash for longer-term wants, like your annual family vacation.
More than any other, this step can be tricky. You’ll have to make choices. Unfortunately, we can’t do everything we want. But if we understand our priorities, we can do anything we choose. Reflect on which of your “wants” is most important to you, then skip the things that don’t bring you joy.
Note: For “Needs” and “Wants,” 50% and 30% are the maxima you can spend. Spending less, in support of more fabulous savings or debt repayment, will help you reach your financial goals faster.
Step 5: Set Your Priorities
What do you want to achieve with your money?
While your ultimate goal might be saving for a big vacation or new house, you first need to build a solid financial base. By getting the necessary foundation right, your security won’t be thrown off by one unexpected expense. Setting your priorities is key to ending financial stress.
These are a few key money priorities you want your budget to tackle:
Build an Emergency Fund
If you’re still living paycheck-to-paycheck, your first goal is setting up a $1,000 emergency fund. Because we all know life loves sneaking up on us. We recommend saving your emergency fund in a high-interest savings account that provides safety plus guaranteed returns. This will ensure that you don’t spend that money while allowing it to continue to work for you while it waits on the sidelines.
Once you’ve tackled your $1,000 starter emergency fund, you’ll want to continue to add to it. Depending on your job, a three- to a six-month emergency fund is ideal. This will protect you from more considerable financial surprises, like a job layoff or health issue.
Step 6: Track Your Progress
It’s official: you’re all set up! But you’re far from done.
Budgeting is a long-term game. You need to check in on your spending regularly to ensure that your needs and wants aren’t creeping beyond their 50% and 30% income designations. Plus, you’ll need to add new budget categories and delete others over time.
We recommend reviewing your budget every week in the beginning.
Checking in every week will allow you to make course corrections before things get too far off track.
Eventually, you’ll get a feel for your spending habits and will be able to extend the time between meetings. However, try to review your budget at least once a month. Even the most practiced and thoughtful spenders see money slip through the cracks when they lose focus!
Step 7: Re-Evaluate and Make Adjustments
One of the biggest mistakes new budgeters make is not sticking with the budget long enough. They get frustrated when they overspend in a category, or an emergency expense sets them back on their goals. Not understanding that there is no such thing as a typical month or a static budget, they conclude that they are “just bad at budgeting,”… and then they give up.
These are the moments to power through!
The first budget you make won’t be your last. You are new to tracking your expenses, so you are going to get things wrong. The important thing is to continue monitoring, review where your weak points are, and adjust your habits and budget accordingly.