How to Make a Budget

A budget is a plan that tracks your income and expenses so you know exactly where your money goes each month. It’s not about restricting yourself – it’s a tool that helps you make intentional decisions with your money.

Think of it as a roadmap for your finances. When you have a budget, you tell your money where to go instead of wondering where it went. This gives you the power to cover your expenses, save for what matters, and spend guilt-free on the things you love.

Here’s how to get started with your budget in seven simple steps.

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 gives you a complete picture of your spending. Break your expenses into three categories: essential expenses, nonessential expenses, and savings and debt payments.

Here’s what typically falls into each category:

Essential expenses may include:

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

Non-essential expenses may include:

• Restaurants and takeout
• Entertainment, such as movies, concerts, and 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, like contributions to a 401(k) or IRA
• College savings for kids
• Short-term savings for goals like vacations or 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.

We’ll cover the 50/30/20 rule in more detail below, but it suggests that 50% of your income should go toward these necessities.

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.

Savings and debt payments

The last category is savings and debt payments, which should take up 20% of your income based on the 50/30/20 method. Use this portion to build an emergency fund, save for future goals, and make extra debt payments beyond the minimum.

If you want to pay off debt faster, flip the percentages – put 30% toward savings and debt, and 20% toward wants.

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 a 3.75% annual percentage yield, or APY, 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: Look for areas to reduce spending in your “wants” category if you need more breathing room.
• Revisit your financial goals: Make sure you’re putting enough toward your top priorities like emergency savings, retirement, or paying off high-interest debt.
• Analyze your spending patterns: If you’re overspending on things like food delivery or streaming services, look for ways to cut back.
• Give leftover money a job: Assign any extra funds to savings, debt payments, or retirement investments.

Once you’ve made it this far, congratulations on creating your budget! The key to success is reviewing it regularly throughout the month. Here’s how:

• Daily or weekly updates: Dedicate some time each day or week to update your budget with your latest transactions – budgeting apps can make this easier. 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. You’ll grow an increasing sense of financial control by keeping your budget up to date.

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 six months of living expenses.

Get the employer match on your 401(k)

If your employer offers a 401(k) match, contribute enough to get the full match – it’s free money for your retirement. You’ll also 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

Aim to save at least 20% of your income across retirement accounts, emergency savings, and other goals. As your income grows, adjust your budget to hit this target.

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. You’re building a stronger financial future one step at a time by giving every dollar a job.

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