How to Budget Money: Your Step-by-Step Guide

A budget is a spending plan. It takes what you spent last month to anticipate what you’ll spend this month.

Making one isn’t easy—and sticking to it can be even harder. Once you start, though, it might not seem as bad as you feared. And over time, it might get easier. Though it’s possible that you’ll be one of those people for whom a budget will always feel like a burden—and that’s okay—the reality is that budgeting should be like brushing your teeth: just a part of your life, whether you like it or not.

In any case, here’s how to get it done, and why it matters.

How to Make a Budget

1. Track Your Spending

Spend a good amount of time going over your receipts and credit card statements. Ideally this should cover your spending for two or three months, so you can get a real idea of how much you spend in a given month. (If you’re looking at a three-month period, for example, simply divide the totals by three to get an average month.)

You’ll need to create categories for your spending: groceries, gifts, and so on. Try to limit the categories so it seems as simple as possible.

2. Separate Your Expenses into Needs and Wants

After you’ve tracked your expenses, you need to place them into two piles: needs and wants. Another way of thinking about this is the term discretionary spending, which describes the money you have left over after you’ve spent what you need to on necessities, such as housing and transportation to and from work.

3. Make a Goal for Yourself

There are several different ways to carve out a budget. Each separates your after-tax income into different sections. A 50/30/20 budget, for example, suggests that you spend 50% of your budget on needs, 30% on wants, and 20% on your savings goals. The 70/20/10 budget, in contrast, says that you should spend 70% of your after-tax income on necessities and discretionary purchases, 20% on investments and savings, and 10% on debts or donations.

One of the biggest things that will affect your ability to stick within these parameters is the cost of your housing. Though expert recommendations vary, one rule of thumb is that your total housing costs should be no more than 28% of your gross monthly income. However, in some high-cost-of-living areas, it’s easy to spend almost 50% of your budget on housing alone—which, with the 50/30/20 budget, gives you no wiggle room in the necessities category.

4. Adjust Your Spending

The next step is to compare how much you spend in an average month to your goal budget, such as the 50/30/20 budget. If you’re spending too much on wants, then you’ll need to make cuts. It’s possible that you’ve found yourself in a state of lifestyle creep, where you’re not being as mindful as you could be of your purchases.

Consider cutting back on purchases that don’t bring you much joy. Take a moment to think about an item’s value before you buy it. Is it actually worth it? Or could you go without?

5. Remind Yourself of Your Long-Term Goals

It can be tough to cut back on purchases, especially multiple items over time. Some people struggle with this more than others, and certain budgets will require more sacrifice than others.

If a near-overhaul of your spending is what you’re facing, you may want to emotionally prepare yourself for the challenge. One way to do this—and this can be helpful for anyone who sacrifices for their budget, even a little—is to remind yourself of what your long-term goals are. Why are you sticking to a budget? Is retirement looming? Are you saving for a major remodel? Whatever matters to you, keep it top of mind. This will help you stay strong when you’re tempted to stray from your budget.

6. Return to Your Budget and Adjust as Necessary

A budget is not a set-it-and-forget-it thing. It’s a living document that you change and edit as you live your life. You make adjustments as your spending changes, and as your life circumstances change. Every so often—every three or six months or so—return to your budget with an eye towards your categories and goals. Do you really need to devote that much money to that category? Can you cut back? Or do you need to expand that category, for some reason? Use these questions to fine-tune your budget on a regular basis. That way, it will reflect your life, rather than gather dust.

Why You Should Make a Budget

1. It Helps You Work Toward Long-Term Goals

A budget forces you to map out your goals, save your money, keep track of your progress, and make your dreams a reality. By seeing what money you earn and what money you have going out through a budget, you can create a map for where you need to go to get your goal, whether that is purchasing a home in a few years or going to graduate school.

2. It Can Keep You from Overspending

Far too many consumers spend money they don’t have—and we owe it all to credit cards. The average credit card debt per borrower rose to $7,236 in Q3 of 2024, according to LendingTree.

Before the age of plastic, people tended to know whether they were living within their means. At the end of the month, if they had enough money left to pay the bills and sock some away in savings, they were on track. These days, people who overuse and abuse credit cards don’t always realize they’re overspending until they’re drowning in debt.

However, if you create and stick to a budget, you’re more likely to not find yourself in this position. You’ll know exactly how much money you earn, how much you can afford to spend each month, and how much you need to save.

3. It Can Make Saving for Retirement Easier

Let’s say you spend your money responsibly, follow your budget to a T, and never carry credit card debt beyond monthly due dates. In addition to spending wisely, budgeting can make saving more achievable.

It’s important to build regular saving and investment contributions into your budget. If you set aside a portion of your earnings each month to contribute to your individual retirement account (IRA), 401(k), or other retirement funds, you’ll eventually build a nice nest egg. Although you may have to sacrifice a little now, it will be worth it down the road.

Here’s an example of how that could work: Let’s say Trina started a new job last year and wants to take advantage of the employer’s 401(k) plan and matching contributions. She knows that including her own monthly plan deferral from her paycheck in her budget as a recurring expense will help her be consistent in building retirement savings. She’s 36 years old, so she knows that for the 2024 tax year, people her age (anyone under 50) can contribute a maximum of $23,000 to their 401(k), before employer matching funds.

So, using a calculator provided by her 401(k)’s management firm, she figures out that she should defer about $442.31 per week, or about $1916.67 per month, from her salary to max out her potential annual contribution for 2024. She adds that figure into her budget spreadsheet under expenses and makes it an automatic subtraction from her disposable income, to separate her retirement savings from her cash available for other expenses.

4. It Helps You Prepare for Emergencies

Life is filled with unfortunate surprises. When you get laid off, face a costly, unexpected home repair, become sick or injured, go through a divorce, or have a death in the family, those circumstances can lead to serious financial turmoil. In these situations, an emergency fund comes in handy.

An emergency fund should consist of at least three to six months’ worth of living expenses, and it should be accounted for when budgeting. This extra money will ensure that you don’t dip into other funds saved for long-term financial goals, such as paying off debt.

Of course, it will take time to save up three to six months’ worth of living expenses. Don’t try to place the majority of your paycheck into your emergency fund right away. The best strategy is to build it into your budget, set realistic goals, and start small. Even if you put just $50 aside each week, your emergency fund will slowly build up. Budgeting apps, such as You Need a Budget (YNAB), provide tools for setting up an emergency fund, depending on your chosen approach.

5. It Can Reveal Spending Habits

Building a budget forces you to take a close look at your spending habits. When reviewing your expenses, you may notice that you’re spending money on things you don’t need, such as a cable TV subscription. Budgeting allows you to rethink your spending habits and refocus your financial goals.

Taking a look at your expenses, you may see that one month, you spent more money on eating out than cooking at home. By reviewing your budget, you can make effective changes as a result. If you see that you’re overspending target amounts set in your budget for such discretionary items, you may choose to adjust how much you commit to luxury or nonessential spending in lieu of saving for a new car or a major home improvement project that could potentially add to your place’s resale value.

The Bottom Line

A budget is a personal spending plan that takes into account expected income and expenses for a specified period of time. It can bring you one step closer toward financial security. Having and sticking to a budget can keep your spending in check and assure that your savings for emergencies and longer-term goals, such as a comfortable retirement, stay consistent.