How to Budget in 5 Steps — and Answers to Budgeting FAQs
A life without a budget is like a road trip with no map, so it’s time to get back on the road.
July 25, 2022
Without a proper monthly budget, money management can feel overwhelming. Knowing how to budget can add consistency and predictability to your personal finances, allowing you to set goals and achieve them.
Having a personal budget is particularly important during times of uncertainty. It gives you a tool to take control of your finances and get through tough times, like periods of unemployment. Below, we'll answer some of the most common queries regarding how to create and manage a budget.
How do you make a budget?
Setting up your budget involves carefully analyzing your financial situation and spending habits. It involves five simple steps:
Set your financial goals
Calculate your monthly income
Figure out your monthly expenses
Determine your discretionary cash
Track and fine-tune your budget
Let’s run through each one in further detail.
1. Set your financial goals
When it comes to setting a budget, you’ll want first to know what your financial goals. If you don’t know what you want your money to do for you or what you’re working toward, it might be hard to stick to a plan. Everyone’s financial goals will be different, but here are some you might consider:
Paying off credit card debt (or other high-interest debt)
Building an emergency fund of three to six months’ worth of your expenses in a high-yield savings account
Saving for retirement or other large savings goals
2. Calculate your monthly income
First, calculate your take-home pay. This is the cash that hits your bank account after taxes, insurance, 401(k) contributions and everything else is deducted.
If you have a fixed income — or income that rarely fluctuates — you can calculate your monthly take-home pay by multiplying the amount in the “net pay” section of your pay stub by the number of pay periods you have that month.
If you have variable income, you’ll need to look at the past few years of tax returns. Calculate your average yearly income from the last two years, then divide by 12. If you pay your own taxes, look at the previous year’s tax returns and divide it by 12 to get your monthly taxes. Then, subtract the monthly taxes from your gross monthly income to get your monthly take-home pay.
You can also use an online calculator to estimate your taxes, but divide the total yearly taxes from the calculator by 12 to get your monthly taxes.
When calculating your monthly income, make sure to account for income sources, like:
3. Figure out your monthly expenses
There are three main types of expenses: fixed monthly expenses, variable monthly expenses and non-monthly expenses. To figure out your monthly expenses, list all your expenditures within each category and add up their total monthly costs.
Fixed monthly expenses
Begin by adding up every fixed monthly expense you have. These are bills and expenses that remain consistent in cost month over month. Fixed monthly expenses may include:
Personal loan payment
Rent or mortgage payment
Car insurance premium
Health insurance premium
Cell phone bill
Cable or streaming subscriptions
Variable monthly expenses
Now move to variable monthly expenses. Variable costs generally stay within a certain range but vary slightly each month. Variable expenses may include:
Credit card payments
Variable expenses are trickier to nail down because you pay a different monthly amount. To get around this, look at the last six to 12 months of your bank statements and find the average monthly cost for each expense over that period.
For example, if you spent $3,500 on groceries over the past six months, your monthly grocery expenses would be $583.33 per month ($3,500/6).
Non-monthly expenses are those that are regular but don't occur monthly. A non-monthly expense may include:
Annual doctor checkups
Quarterly car insurance premiums
Gifts for holidays and birthdays
Yearly property taxes
Yearly homeowner's insurance premiums
Annual club dues
Even though you're not expecting to pay these each month, plan for them as if you were. This way, when that bill comes due, there's no surprise.
When calculating non-monthly expenses to fit your monthly budget, you'll want to add their yearly total and divide that by 12 to get the monthly cost.
For example, if you pay $350 per quarter for car insurance, the yearly cost would be $1,400. To figure out the monthly cost, divide $1,400 by 12 months to get $116.67 per month.
4. Determine your discretionary cash
To determine your discretionary cash, subtract your fixed monthly expenses, variable expenses and non-monthly expenses from your monthly take-home pay.
For example, if you have $3,000 in take-home pay and $2,500 in total monthly expenses, your discretionary cash is $500.
You can then use this extra money to meet the financial goals you set at the beginning of the budgeting process. If you have no discretionary cash — or are coming up with negative discretionary cash — it may be time to set stricter spending limits or try to boost your income (more on that shortly).
5. Track and fine-tune your budget
The final step of knowing how to budget is all about ensuring you remain on track.
Each time you spend money, categorize it and track it against your budget. The categories you use may vary, but some common ones include:
Rent or mortgage: This is the cost of your housing, whether you rent or own.
Utilities: This category covers electricity, water, heat, trash pickup, cable, internet, etc.
Groceries: This is the monthly amount you spend on food and beverages.
Transportation: This can include your car payment, fuel, maintenance, repairs and car insurance, but it may also be your monthly public transportation costs.
Medical care: This covers medical and dental expenses.
Personal care: This is a broad category, but it can include haircuts, manicures, massages and similar expenses.
Clothing: This covers any clothing or shoes you buy in a month.
Entertainment: This is the money you spend each month on fun things like concerts, plays, movies and nights out with friends. The entertainment category may include home entertainment like streaming services or video games.
Dining out: This is the amount you spend at restaurants or getting takeout.
Each month, review your tracking to see if you over- or under-spent compared to the budget you set. Then, make small tweaks to balance it again. Using the budget categories, you can quickly look at any areas where you may be overspending in a given month. Sometimes unexpected expenses can add up.
Answers to FAQs about how to budget
We’ve already covered the basic five steps of how to budget, but now it’s time to dig a little deeper. Here are a few FAQs for new and experienced budgeters alike.
How can a beginner start budgeting?
Learning how to budget for the first time can be overwhelming, but following a few essential budgeting tips will make everything easier.
To start with, be consistent with your budget. Consider the time you’ll need to calculate, track and adjust your budget each month. Then, schedule a block of time each week. Make this a consistent part of your routine, so it becomes just another aspect of your life.
Also, automation can help you save time and stay on top of your bills. Call your service provider, credit card issuer or lender, and ask about setting up automatic payments. In some cases, you can even set these up online.
Once you set up automated payments, keep an eye on your checking account to make sure the payment goes out.
How can I save money monthly?
To save money and avoid overspending, you can lower or eliminate monthly expenses or increase your income.
Consider options like switching to a lower-cost cell phone plan, lowering or negotiating your cable package, dining out less or even consolidating your credit card payments with a debt consolidation loan or a line of credit.
If lowering expenses doesn't put your discretionary cash in the positive, eliminating them is the next step.
To eliminate expenses, list all your monthly expenses in order of importance and eliminate the least important ones. This may result in small sacrifices, like canceling cable or dropping your gym membership, but may also include more drastic cuts, like selling your car.
You could also consider boosting your income with a side hustle, such as:
Being an Uber or Lyft driver
On-demand food and grocery delivery
On-demand task completion
What is the difference between a budget and a financial plan?
A budget is solely about tracking your expenses and income, and it usually focuses on identifying and eliminating unexpected costs and is done weekly or monthly.
Meanwhile, a financial plan is about taking care of all kinds of long-term financial aims, such as meeting savings goals.
You might want to start a budget to help you free up cash to save for retirement, but it’s your financial plan that outlines your strategy for how you’ll invest your money.
How do I make a budget table?
There are many ways to track your budget. Some prefer to use a notepad, pen and calculator to write down all their expenses manually.
Others may use computer software, like Excel to make a budget spreadsheet that helps with calculations and tracking. This way, you can also take advantage of online templates.
For those who prefer something more automated, plenty of budgeting apps — like EveryDollar and You Need a Budget — connect to your bank to import your transactions. All you do is enter the budget for each category and verify and categorize each expense as it comes in.
However, remember to make a backup. When using budgeting software, see if the system allows you to export a file version of your budget and save the file on your computer and a thumb drive or a cloud system. Or, if you run a pen-and-paper budget, either make copies or take a picture of each month’s budget and save them in a secure place.
What is a good budget for a single person?
It’s impossible to give hard figures since there’s so much variation between different regions and circumstances.
For example, if you live in New York and have huge student loans, a “good” budget for you will look very different from someone in a small Midwest town with no debt. Also, if you have a six-figure income, you can afford to be more lenient with your spending than someone on half the salary (everything else being equal).
However, there are a few budgeting systems you may wish to follow to guide you, such as the 50/30/20 rule (also called the 50/20/30 rule) or the 70/20/10 rule.
What is the 50/20/30 budget rule?
The 50/20/30 rule says you should allocate:
50% of your income to unavoidable expenses
20% to either savings or debt
30% to non-essentials
This can help you to work out if you’re dedicating too much money to certain areas — but it’s only a rule of thumb and won’t work for everyone.
What is the 70/20/10 budget rule?
A slight variation on the 50/20/30 rule is the 70/20/10 rule, which says you can allocate:
70% of your money to living expenses
20% should go toward paying off debt
10% should go to savings
This may be suitable for those who don’t have debt or are already happy with their savings.
Create your budget and meet your financial goals
Budgeting is like investing: The earlier you start, the sooner you reap the benefits of reaching your financial goals.
Learning how to budget doesn’t have to be complex. It simply requires setting your goals, calculating your income, deducting your expenses and making adjustments to your spending to create the discretionary cash needed. There are even budgeting tools online and on your smartphone or tablet that make the sometimes-tedious process easier.
Now that you know how to budget, it's time to review your financial situation and create one of your own. With the steps and budgeting tips we've offered, you're prepared to take on this important step toward financial security.
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