Budgeting can sometimes be a buzzkill. But you can’t just go around treating yourself every day without regard to how much money is in your bank account.
That is, unless you’re okay with struggling to make it to the next paycheck, never seeing a dent in your debt and having nothing saved for emergencies.
Now budgeting doesn’t look so bad, does it?
Creating a budget — and sticking to it — could finally give you the financial freedom everyone else seems to have already figured out. And it doesn’t have to be a grueling process either.
How to Budget in 4 Easy Steps
Start yourself on the road toward controlling your personal finances by taking a little time to prepare and learn how to budget in a way that makes the most sense for your lifestyle. We’ve laid out exactly what you need to do in four pretty simple steps.
Step 1: Know How Much You Make and Spend
Before you can make a budget that works, you need to know your numbers. We typically like to focus on a monthly budget, since most bills are due once a month.
Get started by logging into your bank account online and grabbing your last couple months’ worth of bank statements. While you’re at it, grab your credit card statements, too.
How to Figure Your Monthly Income
First, write down your monthly income.
This should be your take-home pay for the month — your net income. That’s the money you earn minus deductions for taxes, Medicare, Social Security, health insurance contributions and allocations to retirement accounts like your 401(k) or Roth IRA.
This part is easy if you have a full-time, salaried job. If you are paid by commission, work hourly or have some other kind of irregular income (like freelancing), use an average of the last six months to get a rough idea. Self-employed budgeters can benefit by taking a step back each quarter to examine their income.
“If you’re paying quarterly taxes anyway, you have this natural stopping point to look,” said Lillian Karabaic, CEO of Oh My Dollar! “It’s a good way to check on the health of your business.”
But don’t just stop there when calculating your monthly income. Add any extra money that comes in from your side hustles, child support payments, recurring bonuses or stipends, financial aid payments — include it all.
How to Figure Your Monthly Expenses
Your next step is the painful part: It’s time to log your monthly expenses.
Start with your regular fixed expenses, which may include your rent or mortgage, utilities, car payment, car insurance, credit card payments, student loans, cell phone bill, internet, cable TV and other monthly subscriptions, like Netflix or Spotify.
Don’t forget to include non-monthly but recurring expenses, like vehicle registration fees, credit card fees, HOA fees, professional association dues and annual subscription renewals. To incorporate these non-monthly but regular expenses into your monthly budget, add up the total cost for a year, then divide that number by 12 to find out how much they cost each month.
“You might open a separate bank account for your annual expenses,” said Bridget Todd, COO of The Financial Gym. “Then when the bills come, you don’t have to adjust your spending. It’s similar to saving for Christmas shopping” throughout the year.
From here, you’ll want to start adding up your variable and discretionary expenses. Analyze your spending habits. How much are you spending on necessities that aren’t fixed expenses, such as groceries and clothing? What about the amount of money you drop on nonessentials like eating out and drinks with friends?
To get a full picture, organize your spending into budget categories. For example, movies, concerts and museum visits can all go under entertainment. Your gym membership, yoga membership and the drop-in rate on that one CrossFit class can all go under fitness.
Look at a few months of statements to get an average for this part, too. That will give you a more accurate picture of your finances.
Step 2: Set Your Financial Goals
If you’re going to succeed at this budgeting game, you need to have an idea of what you’re hoping to accomplish.
It can be a simple short-term savings goal like building a modest emergency fund or funding a vacation with your college besties. Or it can be a long-term one, like learning to budget so you can pay off your mortgage early or your kid can go to college without student loan debt. And don’t forget about funding your retirement — no matter how far you are from that milestone.
Set a goal, and make it a motivating one — your financial plan could be the only thing that stops you from using your credit cards to indulge in mindless retail therapy this weekend.
Next, get your priorities in order — literally. Write them down in order from most to least important to get an idea of where you want your money to go.
You might not get your priorities right the first time, and that’s ok. It’s challenging to choose one option over another, and if the first list doesn’t work well, you can always rework it. Do some adjusting to strike a balance between “fun” and “responsible” spending.
You can take things a step further by mixing financial goals with personal ones. For example, vowing to cook more at home will help you spend less on restaurant meals and stick to healthier food choices.
Step 3: Find Your Favorite Budgeting Method
Once you have a complete picture of your finances, it’s time to pick the budgeting method that works best for you. There are many different budgeting methods to choose from.
Zero Based Budgeting
A zero-based budget is a budget plan where you allocate where every dollar of your income is going each month. When you take your income and subtract all your planned spending, savings allocations and debt payments, you should end up with zero.
With the 50/30/20 budget plan, you spend 50% of your income on essential expenses, 30% on fun and 20% on financial goals like saving, investing or paying off debt. You don’t have to drill down on exactly how much to spend on transportation or take out — as long as you stay within the appropriate percentages.
Cash Envelope System
Followers of the cash envelope system fill envelopes with money to coincide with their spending limits for all of their variable expenses, like groceries or entertainment. Once the envelopes are empty, you have to pause your spending until the end of the month or whenever it’s time to refill your envelopes.
A bare-bones budget takes into account only your most essential needs. It’s fitting for those with low income or people who are trying to eliminate the fat from their budget so they can stack up cash for an emergency fund, other savings or paying down debt.
Log your income and track your spending using A Microsoft Excel spreadsheet or a Google Sheets spreadsheet. Create bar graphs, line graphs and pie charts for data visualization.
Bullet Journal Budget
Use a bullet journal budget to creatively track where your money’s going. You have the ability to customize your budget how you see fit and make it attractive so that you actually don’t mind sitting down to manage your money.
Kakeibo is a long-standing Japanese budgeting method that incorporates mindfulness into a basic household ledger. You’ll track your spending by only using four simple budget categories — needs, wants, culture and unexpected/extra expenses.
With the calendar budget method you’ll use an actual calendar to write down when you get paid, when your bills are due and when you spend money. Jot down your remaining balance at the end of each day.
The half-payment method helps take some of the stress away from paying recurring bills each month. You’ll budget for half of your regular bills a month early so that you don’t face as big a financial burden when the bills actually come due.
The paycheck budget ignores the typical rules of creating a budget to cover your expenses for a month. Instead you’ll budget for each time you get paid — whether that’s weekly, biweekly or semi-monthly.
Even after you’ve picked your favorite budgeting method, don’t be afraid to bend it a little to fit your financial situation. You might choose to incorporate different aspects of various budgeting methods into your personal budget. For inspiration, learn how Kumiko Love, of The Budget Mom, combined three budgeting methods to form her budget-by-paycheck method.
Step 4: Find the Best Budgeting Tools for You
You’re not alone in this quest to budget your money. There are some tools that can help.
Automate Your Budget
Automating the budgeting process helps you focus on your priorities by sending the money where it needs to go before you have the chance to blow it on an impulse.
On the income side, that can mean setting up the automatic deposit for your paycheck to be divided between your checking and savings account.
In the expenses column, you can set up autopay for recurring regular expenses like your car payment or mortgage, helping you avoid those dreaded late fees. And if your bill due dates don’t jibe with your cash-flow situation, you can call a lender or company and ask them to adjust the date.
While budgeting by hand works great, your smartphone can streamline it. A budgeting app is designed to take some of the work of money management off your plate.
Many apps sync to your bank account, automatically categorize your spending and will tell you at a glance how much you can responsibly spend before your next payday.
Other apps require you to manually enter your spending, but they can provide you with insights about your spending habits and highlight ways for you to save money without you having to analyze months of bank statements.
This list of top budgeting apps will help you choose one you love. If you’re managing household finances with a partner, here’s our favorite budgeting apps for couples.
Although some apps charge monthly or annual fees, you can get started with a free trial to see if it’s worth the money.
Don’t Let Setbacks Discourage You
If your first attempt at budgeting seems to be a flop, don’t feel bad. Karabaic, of Oh My Dollar!, likes to remind her clients that the first month you get started with setting up your budget, you’ll forget about things.
“That’s okay. You’re just getting better information” each month as you remember expenses, she said. “The third month is the point at which, if you’re still doing it, you start to feel like you’re in charge of the budget.”
Key words there: If you’re still doing it.
You’re likely to fall off your budget in one of these two ways: You set unrealistic restrictions for yourself and fail to meet them, or you forget to keep up with your budgeting method and give up.
Make sure to include some fun money spending in your budget so your money plan doesn’t feel so restrictive. You may need to recruit an accountability partner — a friend you can share your money goals with and who’ll remind you to stay consistent when it comes to budgeting.
If you don’t have anyone in your life to serve as an accountability partner, you can connect with like-minded people and glean some budgeting tips from members of The Penny Hoarder Community.
Remember, making a budget is not a one-time event. Keep an eye on your plan as your goals and life change. Earning a raise, losing a job, getting married, having kids, starting a business — each of these life changes requires you to review and recalibrate your budget to stay on track to meet your goals and live your life.