Debt Consolidation

How To Make a Budget and Reach Your Financial Goals

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Making a budget is a simple, effective way to improve your financial well-being. The benefits of budgeting are endless: You can curb overspending, put more toward savings and cut back on unnecessary monthly expenses, all by getting into the habit of budgeting.

How to best budget your money depends upon your unique financial situation, so find the budgeting method that works for you so you can reach your goals.

Determine your monthly take-home income

The first step to creating a budget is finding out exactly how much money you take home each month after taxes and other payroll deductions. How you determine your monthly take-home income will depend on whether you’re salaried, hourly or freelance, as well as your pay schedule:

  • Weekly: Once per week
  • Biweekly: Every other week
  • Semi-monthly: Twice per month
  • Monthly: Once per month

For weekly or biweekly salaried workers, it’s easiest to take your gross annual income and divide that by 12, then subtract your taxes and payroll deductions, such as your health insurance premium and retirement contributions.

Salaried workers who get paid on a monthly basis have it easy: Your paycheck is your monthly take-home income. Salaried workers on a semi-monthly pay schedule can simply multiply their paychecks by two to determine their monthly take-home income.

Hourly and freelance workers might have a harder time determining their monthly income, since their paychecks may vary from month to month. Do your best to estimate your monthly income based on the past few months’ worth of paystubs or invoices.

When determining monthly take-home income for budgeting purposes, include any money made from bonuses, tips and side hustles.

List out all your expenses, from loan payments to groceries

Keeping track of your monthly expenses is the heart of budgeting. It’s more than just a step; it’s a habit that needs to be formed over time. It can also be the most tedious part of the budgeting process.

Set aside some extra time when you’re ready to analyze your monthly expenses. It’s time-consuming to go through bank statements and loan agreements to identify past recurring and one-time transactions. It may seem onerous to go through your finances this closely, but it’s critical to making sure you don’t leave out any expenses from your budget.

Here’s a list of common monthly household costs to get you started on listing your expenses:

Budgeting tip: Make room for large annual and semiannual expenses in your budget. Think about things like a yearly subscription, auto insurance premiums and other recurring costs that aren’t always on a monthly basis. That way, you aren’t surprised by a big expense that you didn’t budget for.

Choose a budgeting plan that works for you

50/30/20 budget: Best budget for beginners

The 50/30/20 budgeting rule is a simple way to organize your household budget and decide how to spend your income:

  • 50% should go toward needs, like mortgage payments, utility bills and auto loans.
  • 30% should go toward wants, like dining out, new clothing and streaming services.
  • 20% should go toward savings, like an emergency fund and your retirement savings.

This rule is good for people who are new to budgeting, but consumers of all levels can learn something from dividing their income into needs, wants and savings.

The 50/30/20 is flexible, too. If you find that your “needs” category goes over half of your budget, find ways to cut back on your “wants” expenses. If you have money left over at the end of the month, it’s fine (and even encouraged) to allocate more than 20% toward savings and debt repayment.

Who should use this budget? Beginner, no-fuss budgeters who need a simple way to scrutinize and track monthly spending.

Zero-based budget: Best budget for transparent cash-flow

Zero-based budgeting gives every dollar a job so that you’re left with $0 in unspent income at the end of the month. In short: Income minus expenses equals zero.

No, you won’t have $0 at the end of the month; there just won’t be any “leftover” money that’s sitting in your bank account (or shrinking from your bank balance). While it’s easy to simply designate leftover income to savings and call it a day, zero-based budgeting forces you to decide exactly how much money you want to go into savings and debt repayment, for example.

The concept of zero-based budgeting is simple, but the execution of this budgeting method can be more complicated, because it makes you scrutinize every dollar before you spend it. It also requires a deep understanding of your spending habits, and you’ll have to keep up with your expenses throughout the month to make sure you’re adhering to the budget.

Who should use this budget? Serious budgeters who want to track every dollar spent and cut back on frivolous spending.

Envelope budget: Best budget for cutting spending

The old-fashioned envelope budgeting method involves splitting all your expenses into envelopes for each spending category. This forces you to allocate a certain amount of money for each category and stick with it.

Of course, you can use virtual “envelopes,” as well. Envelope budgeting can help you realize that you might be spending more (or less) on certain categories, like groceries or clothing, than you had originally budgeted for.

Who should use this budget? Consumers who want to find out exactly where their money is going every month.

Track progress with a budget app or budget spreadsheet

Smartphone technology makes it easier than ever to automate your budgeting strategy. Budgeting apps like Mint and Clarity Money make it possible to:

  • Sync your bank accounts for real-time budget updates
  • Track expenses by category or even merchants
  • Get notifications when you’re going over budget
  • Monitor the cost of subscription services

If you’d rather manually input your spending into your budget, then skip the budgeting apps in favor of a simple budgeting worksheet. The process won’t be as automated as it is with budgeting apps, but it also forces you to take a closer look at your monthly expenses. There are plenty of monthly budget planners available online, including the one below.

Prioritize, allocate and automate your savings

Great news: You’re now a savvy spender thanks to your new budget. Budgeting can help you monitor spending, but that’s only half the battle when it comes to personal financial wellness. Once you’ve got budgeting down pat, follow these steps to make the most of your budgeting strategy:

  • Step 1: Build an emergency fund. Creating an emergency fund is the key to getting your finances in order. This ensures that your budget isn’t thwarted by unexpected expenses, like car repairs or medical bills.
  • Step 2: Take advantage of your 401(k). Once you have the money, start adding to your retirement nest egg. If your employer does 401(k) matching, you’re essentially adding money that gains with compound interest to your retirement fund.
  • Step 3: Get rid of high-interest debt, such as a revolving credit card balance. If you carry revolving credit card debt, you’re paying interest on your purchases for no reason. Budget well so you can pay down your credit cards month after month.
  • Step 4: Pay down “good” debts, like student loans or a mortgage. Save money on interest payments in the long run by paying extra toward your debts. Just keep an eye on prepayment penalties to see if paying off the loan early is a good move for you.

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