Many people avoid budgeting because it feels complicated or restrictive. Maybe it’s something you’ve tried before and it didn’t stick, or maybe you’re just not sure where to start. The good news is that it doesn’t have to be overwhelming. Budgeting isn’t about being perfect — it’s about making your money work for you.
Whether you’re trying to stretch your salary, build an emergency fund or pay off credit card debt, a personal budget can help you take control and move forward with more confidence. It’s simpler than you may think and there are always new tools and budgeting methods appearing that can help you get started and stay on track.
How to Budget
1. Figure out your monthly income.
Before you can plan where your money should go, you need to know how much money you have coming in. This means you need to calculate your take-home pay.
If you earn a regular salary, this should be pretty straightforward. But if your income changes from month to month — like if you freelance, work hourly or rely on tips — you can take an average from your last few months’ paychecks or bank statements. This will give you a realistic estimate to base your budget on.
Knowing your monthly income is the foundation of your personal budget. It’s how you’ll set limits, make decisions and avoid overspending.
2. List out all your expenses.
The next step is to list out all everything you spend money on in a typical month. This includes fixed expenses — things that stay the same like rent, car payments, subscriptions and insurance premiums — and variable expenses like groceries, gas and eating out.
You can look through your bank statements, credit card statements and receipts to get the full picture. Once you see all your expenditures in one place, you can start to understand where your money is going and identify spots where you may be overspending.
3. Set your budget.
Once you know your monthly income and your monthly expenses, you can create your monthly budget. You can start by subtracting your needs from your net income. These are your essential expenses — the things you have to pay to live and work:
- Housing
- Utilities and bills
- Transportation (car payments, gas or public transit)
- Groceries
- Childcare and health care
Once your needs are covered, look at how much you can set aside for savings. Even a small contribution to an emergency fund, retirement account or other savings goal can help. Additionally, you can look at putting more toward debt payments to help you pay it off early.
After taking care of savings and needs, you can look at your “wants” and “nice-to-haves.” These are things you enjoy but could scale back if needed, such as:
- Eating out
- Subscriptions
- Shopping
- Travel or entertainment
If your expenses are higher than your monthly income, this is where you can adjust. Look for opportunities to cut back in your “wants” category, or consider ways to bring in extra money.
4. Set your personal finance goals.
Your monthly budget isn’t just a way to manage your day-to-day spending — it’s also a tool that can help you achieve your financial goals. Think about what financial goals you’d like to reach — paying down debt, building an emergency fund or saving up for a down payment on a car or home. Goals can be short-term, like saving $1,000 for a new laptop or long-term like building a retirement account.
5. Track your spending.
Sticking to a budget is much easier when you know where your money is actually going. Tracking your spending helps you stay within your limits and catch small issues before they turn into bigger problems.
You can log purchases manually in a notebook or spreadsheet, or use a budgeting app that connects to your bank account. Try to check in at least once a week to see how your spending compares to your plan. This can help you reveal patterns in your spending habits and adjust.
6. Reevaluate your budget regularly.
Life changes and so will your budget. If you have a change in income and expenses, or you need to adjust your priorities, it can be a good idea to revisit your budget to make sure it’s still working for you.
Go over what you spent, what worked and what felt off. Use that information to make changes going forward.
What are some popular budgeting plans?
There’s no “right” way to budget. The best one to go with is the one that works for you, your lifestyle and your goals. Here are a few of the common budgeting methods people use to help you get started.
50/30/20 rule
The 50/30/20 rule is a budget plan that splits your income into three categories:
- 50% for needs. This includes essentials like housing, utilities, groceries, etc.
- 30% for wants. Think about things like eating out, streaming services, subscriptions or travel.
- 20% for savings or debt repayment. Contributions to a savings account or debt payments above the minimum.
This is a very straightforward budgeting method and it can work well for those who don’t want to micromanage their expenses. However, it’s not very flexible. Depending on where you live and your financial situation, your “needs” may exceed 50% of your income and saving 20% isn’t realistic for many people.
The envelope method
With this cash-based system, you divide your monthly income into physical envelopes labeled by category — like groceries, gas or entertainment. When the envelope is empty, you stop spending in that category until the next month. Many modern budgeting apps have digitized this strategy, allowing you to allocate funds from your bank account into “virtual envelopes.”
This strategy allows you to set the amount of money you want to spend in each category and it can be more flexible than other budgeting plans. If you unexpectedly have to spend more in one of your “needs” categories you can use money from “wants” or “nice-to-haves” envelopes.
Zero-based budgeting
Zero-based budgeting is a budgeting plan that assigns every penny of your income a purpose — whether it’s for expenses or savings. At the end of the month, your total income minus expenses and savings will be zero.
With this budgeting method, you have to carefully keep track of all your spending. This often requires budgeting worksheets and detailed notes. It can help improve your financing awareness, avoid overspending and give you more control of your money. It’s also a time-consuming method and unexpected expenses can make it hard to plan perfectly.
Pay-yourself-first
This method flips the usual budgeting order. Instead of saving whatever is left at the end of the month, you set aside a portion of your income for savings as soon as you get paid. Then, you budget the rest for bills and expenses.
It’s a great strategy if you have a hard time building savings or want to make sure your financial goals don’t keep getting pushed aside.
What are some examples of financial goals?
Start an emergency fund.Unexpected expenses can throw your budget off track. Having a savings account just for emergencies like car repairs or medical expenses can help. Many experts suggest saving three to six months of living expenses, but even starting with $500 to $1,000 can make a difference.
Pay off debt. If you carry credit card debt or have student loans, paying them down can free up future income and reduce stress. A budget can help you stick to a repayment plan and steadily chip away at balances.
Save up for a big purchase. Whether it’s a new car, a vacation or higher education, setting aside a little money each month makes large purchases more manageable — and helps you avoid using credit.
Build long-term wealth. Budgeting can help you build long-term wealth and success. It gives you better financial stability allowing you to set long-term goals like contributing to retirement or investment accounts and build long-term wealth.
What are some options when your budget isn’t enough?
Life happens and even the best planned budget isn’t always enough. Car repairs, reduced hours at work and unexpected bills can throw your finances off balance. But you can regroup and explore your options.
Reduce your expenses. Start by reviewing your spending and look for areas where you can cut back — even temporarily. This could mean trimming your grocery budget, canceling a few subscriptions or putting off other non-urgent expenses. You can also try to negotiate your bills — for example, calling your service providers to ask about discounts or hardship options. Even small changes can help free up more room in your budget.
Earn extra money. If you have the time you can also look for ways to increase your income. You can find gig work and freelance jobs online through apps or local listings to help bridge the gap.
Sell unused items. If you need fast cash, you can try selling unused items around your home. List them online or host a garage sale. Clothing, electronics, instruments and even furniture can help you get the cash you need to cover expenses for the month.
Ask family and friends. Asking a family member or friend to borrow money can also be a good option before you go to a lender. They’ll often give you more flexibility and may not charge you interest. Just be sure to outline how and when you will repay and stick to it to avoid causing strain in your relationships.
Personal installment loan. A personal installment loan can be a good option if you need to cover a large, one-time expense. It can provide you with an upfront, lump sum of cash to help you cover your needs. You can then repay it over time in smaller installments. Just be sure to do your research about the lender and understand the rates and terms before you sign a loan agreement. Installment loans are available through banks, online lenders and other sources. Depending on the lender, borrowers with different levels of creditworthiness — including those with bad credit — may be able to secure funding. Some lenders may offer “no credit check loans,” which typically means that the lender conducts a soft credit check rather than a hard one.
Personal line of credit. A personal line of credit can be a useful tool for covering on-going expenses. If approved, you’ll be given a set credit limit that you can borrow from when you need it. As you repay the balance becomes available to borrow from again. As with any type of borrowing you should do your research and be sure to understand all the terms and conditions.
DISCLAIMER: This content is for informational purposes only and should not be considered financial, investment, tax or legal advice.
