How to Make a Budget

Every budget starts with your income – or the amount of money you receive in a month. That includes regular paychecks and any additional income sources, such as a side hustle.

Your net income, often called your take-home pay or net pay, is how much you earn after taxes and deductions. This figure provides a clear starting point, and you can find it by checking your pay stubs or your employer’s online payroll platform. You can also review your past direct deposits if applicable.

Calculating your monthly expenses will give you a full picture of your spending across different categories. The three main categories are essential expenses, nonessential expenses, and savings and debt payments. Here are some examples of expenses that fall within each category.

Essential expenses may include:

• Housing (rent, mortgage, property taxes, HOA fees)
• Basic utilities (electricity, water, heating, phone, internet)
• Groceries
• Transportation (car payments, fuel, public transit)
• Healthcare (medical bills, prescriptions)
• Insurance (health, car, home, renters, pet)
• Minimum loan and credit card payments
• Childcare
• School tuition and fees
• Pet care (food, vet visits)

Non-essential expenses may include:

• Restaurants and takeout
• Entertainment (movies, concerts, events)
• Travel and vacations
• Clothing and accessories
• Streaming services
• Gym and club memberships
• Hobbies and leisure activities
• Beauty and grooming services
• Gifts and personal shopping

Savings and debt repayment may include:

• Emergency fund savings
• Retirement savings (401(k), IRA)
• College savings for kids
• Short-term savings (vacations, big purchases)
• Extra debt payments above the minimum requirements

Essential expenses, or necessities

The list above is just an example – it’s your turn to make a list of your nonnegotiable fixed expenses. These are regular monthly expenses, like your rent, mortgage, groceries, utilities, or transportation.

Following the 50/30/20 rule (more on this below), 50% of your income should go toward these necessities.¹

Nonessential expenses, or wants

Next, list your nonessential expenses. These are wants, not needs, and include discretionary spending like eating out, entertainment, travel, or other personal purchases.

Following the 50/30/20 rule, you would put 30% of your income toward your wants.¹

Savings and debt payments

The last category is for savings and debt payments, which should take up 20% of your income based on the 50/30/20 method.1 Dedicate this part of your budget to preparing for the future, reaching savings goals, and creating a financial cushion for emergencies.

If you have debt, you can also fit additional debt payments above the minimum requirement in this category. If you want to pay off debt faster, you might adjust the percentages so you’re only paying 20% toward wants and 30% toward savings and debt payments.

The next step is setting your financial goals. Aligning your budget with your goals helps you see it as a means to an exciting end, rather than thinking of it as restrictive. To set your financial objectives, assess where you are now and where you want to be in the future.

You can break this down into short-term and long-term goals:

• Short-term goals include building an emergency fund, paying off credit card debt, or saving for a vacation.
• Long-term goals include retirement planning, homeownership, or funding your child’s education.

Once you have your own list of goals, be specific about the amount of money you need to reach the goal and the timeline you want to achieve it.

For example, if you want to save $5,000 over the next year, you can calculate how much to set aside each month using our savings goal calculator. Assuming you have a savings account with 3.75% APY (annual percentage yield), you’d have to save $409.55 each month to hit your goal.

There are several budgeting methods you can follow. Choose one that feels manageable and allows you to be consistent. Here are some common methods to make a budget:

• 50/30/20 budget: The 50/30/20 budget rule divides your income into three categories: 50% goes to necessities, 30% goes to wants, and 20% goes to savings and debt payments. This method is a simple way to get started if you don’t know what percentage of your income to spend across different budget categories.
• The envelope method: The envelope method is a cash-based approach ideal for anyone who tends to overspend or wants to avoid credit card debt. First, you set a spending limit for each expense category, such as groceries or eating out. Then, you put your cash for each expense category into separate envelopes at the beginning of each month. Once the envelope is empty, you stop spending in that category for the month. Since you’re using cash and not credit cards, this method can help you avoid spending past your means.
• Zero-based budget: With the zero-based budget model, every dollar has a purpose. For instance, some dollars will be designated for rent, while others will go toward retirement savings. Zero-based budgeting requires careful planning and tracking, but you’ll spend each dollar more intentionally.

Finding a sustainable method based on your spending habits, lifestyle, and goals may take trial and error. If one method isn’t working out for you, try another to see if it’s a better fit. Ultimately, the goal is to find a budgeting strategy that works for you.

Need a jump start? Start by watching our video on how to build a budget. Then, download our budget template, which you can edit on your computer or print out if you prefer a hands-on approach. You can also keep it handy as you work through these budgeting steps.

Once you have a clear view of your income and expenses, you can adjust your budget as you go. The tips below can highlight where you stand and any potential changes you need to make:

• Examine each expense: Are there areas where you can reduce spending? Identify any items you can pull back on in your “wants” section if you need more wiggle room in your budget.
• Revisit your financial goals: Are you investing enough in them? Adjust your budget to prioritize your most important goals, like building an emergency fund, saving for retirement, or paying off high-interest debt.
• Analyze your spending patterns: If you’re overspending in specific categories, such as food delivery or streaming services, consider how you can cut down.
• Be strategic with any leftover funds: Don’t leave any leftover money hanging – give it a purpose that aligns with your current goals. That could mean increasing your monthly savings, putting more toward debt, or increasing your retirement investments.

By reviewing your current spending and making adjustments along the way, you put yourself in the driver’s seat of your financial future.

Congratulations on creating your budget! Now let’s make it work for you. Regularly reviewing your budget throughout the month is the secret sauce. Here’s how:

• Daily or weekly updates: Dedicate some time each day or week to update your budget with your latest transactions. This practice keeps you aware of how much you’re spending on needs, wants, and savings.
• Stay flexible: Your budget isn’t static, so don’t be afraid to tweak it. If your energy bill spikes, adjust another part of your budget to balance it out. Being proactive ensures you cover all your essentials and avoid any costly surprises.

Your budget is a tool that evolves with your life. By keeping it up to date, you’ll grow an increasing sense of financial control.

As you continue reviewing and updating your budget, consider the following milestones to work toward.

Build an emergency fund

An emergency fund is your financial safety cushion for unexpected expenses or emergencies. To stay financially secure, aim to save enough to cover three to nine months of living expenses.²

Get the employer match on your 401(k)

Take full advantage of your employer’s 401(k) match (if they offer one). Contribute enough to snag the maximum employer match, as this will maximize your savings. Maxing out this benefit will help build your retirement nest egg, and you may gain access to valuable tax benefits.

Tackle high-interest debt

Paying off high-interest debt, such as credit card debt, should also be a priority in your budgeting game plan. Find ways to fit debt payments into your budget and use extra cash to bring down that balance faster.

Once those high-interest debts are under control, you can redirect that money to savings or other financial goals.

Save at least 20% of your income

Save at least 20% of your income to build a sturdy financial foundation and prepare for the future. This includes funding your retirement accounts and emergency fund and setting aside money for other savings goals. Adjust your budget to make it happen as your income grows.

Learning how to make a budget is a huge win for your financial journey. Rather than feeling restrictive, a budget can empower you by giving you control over your income and expenses. By giving every dollar a job, you’re building a stronger financial future, one step at a time.

For more insights on why budgeting matters and how it can shape your financial well-being, learn why budgeting is important.