How to Budget Money: Tips & Tricks

Written by Meagan DrewReviewed by Nathan Brown, CFP®Updated: 4th Nov 2022
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Budgets are one of the easiest and best financial tools to help people track their income and expenditures.

Once budgeters have that in hand, they can use budgets to help them achieve goals: paying off debt, saving for a future purchase, or making sure their retirement is full of booze and yachts.

Budgets are very personal, but they don’t have to be complicated.

How to Budget Money (Step-by-Step)

#1. Get Your Financial Documents and Statements

This step might seem like one you could skip because the amount on your paychecks is burned into your brain forever, but don’t skip it.

Gathering your financial documents is the best way for you to see the whole picture instead of just part of it.

For this part, you will want to gather bank statements, credit card statements, recent bills for recurring expenses, and pay stubs at a minimum. If you are making any contributions to investments, grab those documents too.

#2. Calculate Net Income

Net income doesn’t mean the amount you agreed to when you started working, it means the amount you make after you pay all your taxes, and for most people, this will be your actual take-home pay at the end of the month because your employer deducts your taxes from your check.

Self-employed people need to consider the taxes they need to pay.

#3. Understand and List Your Monthly Expenses

This is the part of the process where the rubber starts meeting the road. If you spend money in a month, now is the time to list it.

This includes things like mortgage payments, student loans, car payments, but it also includes all the runs to Taco Bell at 2 am. You want to make sure that you are accounting for all dollars spent.

Don’t forget groceries, personal care, entertainment expenses, savings, insurance, and healthcare costs. This step is just that- a list.

You don’t have to do any adding or any analysis. Basically, if you spend it, you simply write it down.

#4. Identify Variable and Fixed Expenses

Identifyingvariable and fixed expensesis the next piece of this puzzle. Fixed expenses are things that are the same every month.

These expenses are usually mortgage payments, rent, car payments, internet services, student loan payments, and subscription services.

These will vary from person to person, but you’re just looking for the payments you make every month that are reliably the same.

Variable expenses are those which change from month to month. Common variable expenses include things like gas for vehicles, groceries, eating out, gifts, and entertainment.

Variable expenses are not restricted to these categories, obviously, but are just expenses that are not the same every month.

#5. Add Up Expenses

For the first time in this process, it’s time to break out the calculator. During this step, you need to simply add up your expenditures and record the number.

Make sure that you account for everything you listed earlier, even if you think you could “cut it.” This isn’t the step for that. Add it all up.

#6. Subtract Expenses from Your Income

If your palms are getting a little sweaty at this part, you are not alone. This quick calculation will tell you whether you are living within your means or whether you’re YOLOing a little too hard.

If your expenses are less than your income, you are on the right path. If your expenses are greater than what you’re making every month- chances are you already had a good idea of that fact- and you need to do some refining on needs versus wants.

At this point, you can cut some things from your spending like unneeded subscriptions, eating out expenses, entertainment, etc. Once you’ve discerned needs vs. wants, circle back to step #5 and proceed.

#7. Decide What to Do with the Money Saved

Now that you have an idea of your spending and what discretionary funds leave you each month, the next step is deciding how to allocate it.

Some people might want to use excess funds to pay down debt or bulk up savings. This money can also be used for vacations or special gifts. Just as spending habits are personal, these goals are too.

Another thing to consider is if you want to use all your leftover money to do one thing or split it up to fund a few different goals.

If you have high-interest debt, it is probably best to start there or if you’re out flapping on a wing and a prayer with no emergency funds, building that up is a great goal too.

How to Use Your Budget

Budgets are, above all else, tools. Tools are only as useful as the person using them. Once you have a firm grasp of the money coming in and going out, your budget is a fluid document that becomes a plan, not just numbers on a piece of paper.

Budgets help you spend less than what you make, which is, ultimately, the foundation to meet any future goals like emergency savings or paying down debt. A budget can also identify spending habits that could be refined to free up more money for the future.

Variable expenses are the expenses that are most likely to balloon without accountability. There is a reason why so many people make jokes about “being an adult is having the conversation with yourself that we have food at home.”

While $10 here and there on entertainment or eating out might not seem like much, it can add up if you’re not keeping track.

Budgets are not designed to make you cut out your beloved Chipotle burrito forever but rather to help you keep track of how many burritos you can eat and still stay on track.

Whats the Purpose of a Budget?

The Budget’s most basic purpose is to help you determine whether or not you can afford the lifestyle you’re living or planning to live.

Budgets allow you to clearly outline what money is income and what your expenditures are each month, year, or timeframe that works best for you.

If your income is not enough to cover your output, you know you need to make some adjustments. A secondary purpose of budgeting is to help you determine your wants and your needs.

While you may think that you cannot live without the best Pho ever 3x a week, you may find that to pay for gas that gets you to the job that pays for the Pho, the pho has got to go.

Why Is It Important to Budget?

While YOLO is true, it probably is not the best financial strategy for most people. Even MC Hammer and 70% of lottery winners go broke within a few years because they don’t have a plan.

The amount of money that you have is not as important as managing how the money that you have is spent.

Budgets allow you to see where your money is going and if you have more money going than coming. They can also help budgeters simply understand their spending patterns.

Budgeters may find that their spending is well under what they are bringing in, but budgets can also help to put excess funds to good use.

The most obvious reasons to Budget certainly include paying off debt, saving for a big purchase, saving for retirement, or saving for a vacation.

Budgeting is important, but the importance of what you’re budgeting for is completely individual.

Why Is Budgeting Money Hard?

Budgeting is simple, but it can be one of the hardest things to do for a couple of reasons. For starters, most spending these days is done via electronics.

Not too many people are carrying around wads of cash or even writing checks. Our electronic spending without tangible evidence of our spending makes budgeting much more difficult than when cash and checks with the registers were commonplace and didn’t get you mean stares from Karen at the grocery store.

Budgets also require a component of self-discipline that can be rather uncomfortable. It’s difficult to face our own bad choices, and budgets put all our business on paper for us to review in black and white.

There is also an element of thinking budgeting will be harder than it is. The best budgets don’t restrict to the point of failure. Budgets that are going to work long-term make gradual changes over time.

Types of Personal Financial Budgets

There are three main types of personal budgets.

Zero-Based Budget

The first is the zero-based Budget which is a lot like what it sounds like in that you want to make sure that every single dollar has a job every month.

These budgets are the most precise and require budgeters to closely track expenditures because they’re going for a zero balance every month.

Thus, if these budgeters overspend in one category, they might leave themselves in a lurch at the end of the month.

50/30/20 Budget

The second type of personal Budget that is most popular with financial professionals and budgeters who prefer less rigidity is the 50/30/20 budgeting rule.

In this Budget, 50% of a budgeter’s income goes to things they need like a place to live, a car to drive, gas for the car, healthcare costs, etc.

The 30% of their income goes to wants. Wants include things like subscriptions, entertainment, and dining out.

The wants category can get a little out of hand, and that’s where most people derail without a budget, keeping them on the right path.

Goal-Based Budget

The last of the three main budget types is the goal-based Budget. This Budget is designed with the end in mind. These budgets are usually shorter-term and are focused on helping budgeters stay focused on their goal.

A goal-based budget is a great place to start for those looking to save for a new vehicle, a downpayment for a home, or a vacation.

Goal-based budgeting might also be the perfect plan for someone that needs to build an emergency fund.

The most important component of a goal-based budget is that all the extra money every month is funneled toward your goal, and you spend with that goal in mind.

Is it Hard to Build a Budget?

Budgeting does not have to be hard, and you don’t have to make it complicated. Budgets can be scribbled on a scrap sheet of paper or as complicated as an excel sheet with all the bells and whistles Microsoft has to offer. The key components of any budget are what you are making, what you are spending, and planning for.

Tips for Budgeting Money

Remember, budgets aren’t rigid. Budgets are fluid tools to help you meet your goals. If you can’t look yourself in the face because you bought yourself a new pair of boots, it might be time to rethink your budget.

It is also imperative that you leave room for mistakes and surprises. Budgets don’t have to be all or nothing.

The biggest tip to budgeting success is having a clear goal in mind. Is your goal to better understand your spending? Save for a trip? Have emergency savings?

Secure the retirement of your dreams? You’re more likely to be successful if your why is bigger than your why not.

Bottom Line: How to Budget

Budgeting provides a plan or way forward based on an individual’s income versus expenses.

Even if you don’t want to get complicated, everyone can benefit from an understanding of their spending habits and comparing what you’re spending to what you’re making can provide just that while also helping you worry less and save more.

Meagan Drew
Meagan Drew

Meagan Drew is a Senior Personal Finance Writer & Product Analyst with 7 years experience in wealth management. As a former Series 7 and 63 certified advisor, Meagan specializes in making financial topics relatable and consumable, no matter the reader’s experience level. She attended the United States Military Academy at West Point where she studied Nuclear Engineering. Meagan is a veteran, military spouse, and mom of 4 currently living in Colorado Springs. Her areas of expertise are military personal finance, credit cards, personal loans, investing, and wealth management.