Do you wonder where your hard-earned money goes each month? Learning how to budget is the key to controlling your spending and achieving your financial goals. Without a budget all of your financial initiatives are likely to go up in smoke, leaving you unable to manage your spending.

Let’s look at the basics of creating a spending plan to manage your money wisely.

What Is a Budget?

A budget is your plan for what you will do with your income. Some make a basic budget that simply compares their income to expenses to avoid overspending. Others make detailed budgets that assign a specific purpose to each dollar. Each person budgets differently, but almost everyone finds that a budget is one of the most effective money management tools.

📘 Further reading: How Much Can You Save in a Year?

How to Start Your Budget

Making your first budget takes a few minutes by following this step-by-step approach. You can create a budget using pen and paper, a spreadsheet or a budgeting app.

Step 1: Calculate Your Monthly Income

List any income you earn from your day job, side hustles and investments.

If you earn a variable monthly income, list your base salary using the average number of hours you work or commissions that you receive.

Step 2. List Your Monthly Expenses

The next step is writing down your regular monthly expenses.

Some of the common monthly expenses include:

  • Rent
  • Utilities (i.e., electricity, water, gas and trash removal)
  • Groceries and restaurants
  • Commuting expenses
  • Insurance 
  • Entertainment
  • Phone, internet and cable tv services
  • Loan payments
  • Charity Donations

The best way to determine your monthly expenses is to write down everything you spend for a month or more before setting up your budget. Many people who try detailed expense tracking for the first time discover spending that they were hardly aware of, and it can be substantial.

📘 110 Budget Categories to Help You Start Your Budget

Step 3: Reduce Expenses and Assign Spending Targets

The primary goal of any budget is to spend less than you earn. First, compare your expenses to your income. If you spend more than you make, look for ways to spend less money to balance your budget.

Once you bring your spending under your income, continue looking for ways to spend less on unessential purchases. The bigger the gap between your spending and your earnings, the more you can set aside.

After reducing your expenses, set a monthly spending limit for each category. You can assign a specific dollar amount or a percentage of your income.

Step 4: Make Savings Goals

Assign a savings goal to any extra income you have each month. You can divide your savings into short-term and long-term goals.

Some common goals include:

  • Retirement savings. If your employer offers a 401(k) plan it’s important to contribute, especially if your employer has a matching contribution program. That’s free money!
  • Building an emergency fund. Many experts suggest an emergency fund that can support you for three to six months. An emergency fund can help you handle unexpected situations without going into debt.
  • Specific savings goals. You may want to save money for a vacation, a desired purchase, a down payment on a house or car, or something else.

Once you’ve set and prioritized your savings goals and budgeted an allocation for each goal, decide where you’ll save the money for each purpose. Our guide on saving money should give you an idea of where to put money allocated to different goals.

Step 5: Have Budget Review Sessions

Set aside 15 minutes each week to compare your actual spending to your planned spending. Make adjustments as necessary to look for ways to spend less in other budget categories to offset the expenses that you cannot reduce.

In the beginning, you will probably find that your budget needs some adjustments. That doesn’t mean you failed at budgeting, so don’t be disappointed. A budget is a living document that evolves to fit your needs, and almost everyone takes some time to find the formula that works best for them. Stay with it!

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Different Budgeting Strategies

There are several different budgeting methods you can use to track your income and expenses. Budgeting isn’t rocket science, but having a complicated budget can cause you to give up in frustration. A budgeting strategy will help you focus on the details and build a budget that works for you.

Here are some of the most popular strategies that you can pursue. No one strategy is right for everyone: you’ll have to choose the one that suits your situation and your goals!

Zero-Based Budget

A zero-based budget assigns each dollar you earn to a specific expense or savings goal. This budgeting strategy lets you know exactly how much you spend on each expense, savings goal and debt payment.

One downside of zero-based budgeting is planning for variable expenses like gas, repairs or electricity bills. Make your best estimate and transfer any money you don’t use into savings for a more expensive month. There will be unplanned purchases each month, so set aside some cash for a miscellaneous purchase category.

The zero-based budget is a good strategy for people with consistent, predictable earnings and expenses. It may not be the best choice if your income and expenses vary widely each month.

50/30/20 Budget

You may prefer to assign a percentage to each expense type. The 50/30/20 budget rule recommends dividing your after-tax income into these expense types:

  • Needs, including minimum monthly debt payments (50%)
  • Wants (30%)
  • Savings, investments and extra debt payments (20%)

Within each category, you assign a spending amount for each need, want and savings goal.

The 50/30/20 rule can give you more spending flexibility than a zero-based budget. However, if your needs consume most of your income, you must sacrifice your wants and savings goals. You might have a 60/20/20 budget until you can reduce your necessary expenses or boost your income.

50/30/20 Buget Calculator
Set Your Own Percentages

Envelope System

The envelope budgeting system, also known as cash stuffing, lets you assign a specific dollar amount to each expense or savings goal. If you use cash regularly, you can label a physical envelope for each category and fill it with money. Once you use the envelope funds for that month, you don’t spend any more on that category until the next month.

If you use debit cards or credit cards to pay for purchases, there are several envelope-based budget apps. You can create virtual envelopes and track spending from your phone to avoid overlooking any card purchases or bank withdrawals.   

Assigning a certain amount of cash to each budget category can help you avoid impulse spending.

Values-Based Budget

People who know budgeting is important but don’t want to follow a traditional formula should consider a values-based strategy. This budgeting strategy can help you enjoy life each month.

After paying your essential bills, you dedicate your remaining income to the expenses that are most important to you. If fitness is important to you, you may decide to spend your extra cash on exercise equipment or home workout essentials. Frequent travelers may choose to use their funds to go on trips more often.

One potential downside of values-based budgeting is not saving enough for future expenses. You will need to find a balance between near-term pleasure and planning for the future.

Budgeting Tools

Using a free or premium budgeting tool can make it easier to track expenses and your goals. There are many popular apps designed to assist you with building and following your budget.

You Need a Budget

You Need A Budget (YNAB) is a great choice if you want an in-depth budget. YNAB walks you through the entire process and enters your average costs for many ordinary expenses.

Couples can also benefit from using YNAB as multiple devices can access the app in real-time to track spending and update budget progress.


Those who prefer spreadsheets will like Tiller. This app links to your bank accounts and payment cards. Your transactions can auto-categorize and export to Google Sheets and Microsoft Excel. Tiller offers spreadsheets for several different budgeting strategies.


Consider Goodbudget if you want to use the envelope system. You can create virtual envelopes and sync your budget with multiple devices. Goodbudget also tracks your debt payment progress.

Monthly Budget Spreadsheet Template

Free Monthly Budget Spreadsheet Template

  • This simple monthly budget template makes budgeting fun and exciting.
  • Easy-to-follow instructions so you can get started budgeting in no time.
  • Access your budget online from anywhere. See all features


    Budgeting as a Couple

    Making a successful budget as a couple requires more effort than budgeting alone. These tips will help you succeed.

    Discuss Wants and Goals

    Sharing a common vision is vital to budgeting as a couple. When making a budget, sit down together and review the essential expenses, wants, and savings goals.

    Using a budget app for couples can also be helpful. Many premium apps sync with multiple devices. Apps like Honeydue offer a joint bank account and budget templates and let couples chat in-app to categorize transactions.

    Discuss Large Purchases Before Hand

    Couples can avoid money stress by discussing expensive purchases above a specific price. Small purchases don’t need mutual approval as the budget should allocate some cash for each person for personal spending.

    Schedule a Joint Review Session

    In addition to communicating about large purchases, couples should schedule a weekly or monthly review session.

    Many premium apps provide reports that can make reviewing transactions easy.

    Why Make a Budget?

    A budget makes it easier to see how you spend your money each month. Comparing your income and expenses can help you quickly decide if you can afford a purchase. Budgeting also makes it easier to determine how much you need to save each month for specific short-term and long-term money goals.

    A budget can help you stop living a paycheck to paycheck lifestyle. Living paycheck to paycheck is risky: if you have unexpected expenses or you’re suddenly out of work, you may not be able to pay the bills. That can mean late fees, high interest rates on credit card balances, and lasting damage to your credit. A budget can help you build reserve funds and break out of the paycheck-to-paycheck lifestyle.

    How Much Can You Save With a Budget?

    Saving money is possible with almost any budget. You won’t know how much you can save until you analyze your spending patterns and set up your budget. Once you know how much you’re spending, you can set goals and choose ways to reduce your spending or increase your income to meet them.

    For example, you might decide that you want to set aside a specific amount, such as $100 a month. Some ways to produce an extra $100 a month can include:

    • Cooking your meals instead of ordering takeout
    • Canceling unwanted subscriptions
    • Reducing entertainment spending
    • Adding a roommate to share the rent

    Once you’ve decided how much you want to save and how you’re going to save it, you can build a budget that supports those plans.

    How to Stick to Your Budget

    Making a budget gets you only halfway to your goals. The other half is following your budget, and for many people, it’s the harder part. Choosing the right strategy and using the right tools can make it easy to follow your budget. These practices can also motivate you.

    Start With Small Goals

    Make small and easy to achieve money goals. Create more challenging goals as your finances and money skills increase.

    Use One Bank Account

    Only using one bank account to pay your monthly bills makes it easier to track every expense. Having an accurate budget that tracks all of your income and expenses is essential to know if you’re living within your means. If you use a single account, your account statement can serve as a summary of your spending.

    Automate Savings and Investments

    To avoid accidentally spending your savings, schedule automatic transfers to your savings accounts and investment accounts. If you’re saving for a future purchase, consider making a special fund specifically for that expense.

    Use Financial Calculators

    Free online financial calculators can help you estimate how much money you need to set aside each month for your various goals. You can find calculators for these purposes:

    Calculators can remove the guesswork and keep you focused on your goals.

    Make a Shopping List

    If you’re prone to making impulsive purchases, make a shopping list before going to a store or website. Only add items to your cart if they are on your list.

    Set Daily and Weekly Spending Limits

    Spending limits for your unplanned purchases can help you avoid overspending. When you spend too much, you must reduce spending on your other non-essential purchases. You might also decide to wait at least 24 hours before making any purchase over a certain amount. Waiting time can help you avoid impulse purchases and decide if you really need to make that purchase this month.

    Pay Cash for Large Purchases

    When possible, use cash and avoid borrowing money or using installment plans to make large purchases. Taking on debt adds another monthly payment to your spending. Most loans charge interest that increases the total purchase cost and reduces your disposable income. If you use a credit card you will have to pay that balance off in full or face an extremely high interest rate.

    Avoid Hidden Fees

    Small hidden fees that banks and other services charge erode your free cash. Look for free bank accounts that don’t charge monthly account fees or ATM withdrawal fees.

    Set due date reminders to avoid late fees for your recurring bills and loan payments. Some merchants offer a discount when you link your bank account to send payment on the same day each month.

    Building a budget and sticking to it are core elements of any strategy for financial success. Budgeting allows you to control your spending and generate surplus funds every month. That opens the door to saving, investing, and long term prosperity. It all starts with a budget, and if you don’t have one, you need one!

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