How to Budget Your Money

Unless you’ve recently struck gold or won the lottery, you probably have more wants and needs than you have enough money to fulfill. A budget helps you to figure out what matters most to you, and make sure you’re prioritizing your spending.

The good news is that while setting up a budget requires a little work, it isn’t too difficult. After you’ve done the initial heavy lifting, managing your budget on a monthly basis can become an easy, reassuring routine.

How to make a budget

A budget is an estimate of how much money you will earn and spend over a given period of time. Many people set up their household budgets to reset on a monthly basis.

If you’re creating a budget for the first time (or the first time in a while), the following steps should help.

1. Calculate how much you earn

Before you start planning how to spend your money, you need to have a good handle on how much money you actually bring home.

When you calculate the wages or salary you earn, start with your gross earnings (aka the money you earn before taxes and deductions). Make note of the money your employer automatically takes out from your check, such as tax withholdings, healthcare costs or 401(k) contributions. You’ll need to include these amounts in your expenses (below).

Besides your wages and salary, you can also include other money you routinely receive like:

  • Earnings from a part-time job or side hustle
  • Alimony or child support
  • Social Security or pensions
  • Royalties

2. Figure out where you’ve been spending your money

If you want to move forward, you need to know where you’ve been.

This is true in many areas of life, including your finances. If you’re determined to change your financial habits, you need to figure out exactly which bad habits you need to break.

“Awareness is key,” says New York-based attorney Leslie H. Tayne of Tayne Law Group. “You need to know yourself, your spending habits and your goals financially.”

There’s just one problem. If you’re not already in the routine of budgeting, you may not know where you’ve been spending your money. Sure, you could probably recall some vague habits like, “I visit Starbucks a lot.” But the actual amounts you’re spending in different categories can be hard to guesstimate.

These tips may help you understand where you’ve been spending your money:

  • Access your recurring, monthly bills from your bank and credit card statements. Write them down.
  • Look up how much you owe on each credit card account, including the interest you’re paying, and the minimum monthly payment. If you currently owe outstanding credit card debt, you’re not alone. Over 40% of all U.S. households currently carry some form of credit card debt.
  • Review your statements to discover how much you’ve been spending in “non-essential” categories like dining out, gas and entertainment. Your credit card issuer might provide a tool that breaks down your key spending areas.

3. Set your spending and saving goals

Once you've figured out how much money you’re bringing home, and understand how you’ve been spending your money, it’s time to set your spending and saving goals.

Goal setting is one of the best parts of budgeting; it’s where you decide what you want to do with the money you’ve worked so hard to earn.

Do you want to travel? Is your goal to stash away a big enough nest egg so you can retire early? Do you long for the peace of mind that comes from being debt-free? Whatever your big money goals may be, a sound budget is the key to reaching them.

After you’ve listed your goals, make a list of your non-negotiable expenses. Every budget is different, but here’s an idea of how much the average household in the United States (with an average annual income of $63,784) spends on “essential” expenses.

ExpenseAverage Monthly Cost (Approximate)Percentage of Budget
Utilities and misc. household costs$58911%
Groceries and dining$55010%
Payments on existing debts (or savings)$4388%
Clothing and related services$1343%
Personal care products and services$511%

If you do the math, you’ll notice the non-negotiables above only add up to $4,274 per month, or 80% of the average household budget. In this example, that leaves approximately $1,041 per month (20%) to use on “optional” expenses.

Consider these tips as you work on your budget:

  • Certain expenditures may be impossible to cut from your budget, like child care (an average expense of nearly $10,000 per year, for day care based services), transportation or even housing. Yet you might be able to reduce your costs in these areas if you want to save money.
  • Even small reductions in the cost of non-negotiable expenses could add up to significant overall savings.
  • When you add your savings goals into your budget, make space for both an emergency fund and your retirement savings.
  • If you’re working to pay down debt or build an emergency fund, you might save less aggressively for retirement at first. Yet it’s still good to try to fit a little retirement savings into your budget now. This way, once you’ve tackled high-interest debt and established an emergency fund, you’ll already be in the habit of saving for retirement.

4. Make a plan for leftover cash

Now it’s time for the best part of budgeting – figuring out what to do with any money that’s leftover.

In the example above, $1,041 per month remains after non-negotiable expenses. First, you could figure out how much of the surplus you want to dedicate toward your big money goals. (Remember to include some savings goals in the mix.)

Next, you can add in any optional expenses which are important to you like entertainment, vacations, gym memberships, additional savings or insurance, etc.

5. There’s an app for that (or just an old school spreadsheet)

After setting up your budget, you need a consistent way to track spending so that you can make sure that you’re staying committed to your goals.

There’s no single “best” way to track your budget. However, there’s probably a way that’s best for you.

When you first get started with a budget, try out multiple tracking approaches to find the option that suits your personality and lifestyle the best. Here are a few options to consider:

  • You Need a Budget (YNAB): The app has lots of bells and whistles, but there’s a fee. YNAB is free for 34 days then $6.99/month (billed annually at $83.99/year).
  • Mint: There’s no cost to use Mint. The app will sync with your bank and credit cards, helping you to automatically track income and expenses.
  • Download free budget worksheets or spreadsheets, like this one from the Federal Trade Commission.

6. Get your partner on board

A couple that budgets together, stays together – or something like that.

In reality, a sound budget could be good for your relationship and household finances. A MagnifyMoney survey reveals that 21% of divorcées cited money as the cause of their divorce. For higher earners of $100,000 or more per year, that number jumps to 33%. (MagnifyMoney and ValuePenguin are both owned by LendingTree.)

While a budget isn’t a magic wand to solve all of your money problems, it doesn’t hurt to have one either.

When you share your household finances and expenses with another person, the best way to set up a successful budget, is to do it together. Your budget may be hard pressed to succeed if you try to implement it without the support of your partner.

Evan Sutherland, co-founder of the, gives this advice: “Talk to your partner, not about spending less money, but rather about how you want to spend your money more strategically and efficiently. The only way to do this is with a budget.”

Putting your budget into action

Don’t take a “set it and forget it” attitude when it comes to your budget. Instead, take the time to give your budget at least a quick checkup each month (maybe even weekly when you’re starting out). Then, consider adding in a more intense evaluation of how you’re doing each quarter.

If you’re working with a spouse or partner, Financial Counselor Laura Coleman, Founder of Family Money Coaching in Cleveland, Tenn., recommends setting up something she calls “Money Dates.” During these dates, Coleman encourages her clients to “remember you’re in a partnership and your relationship is equal. Don’t judge if your spouse says he/she needs the money for buying presents and you think the money should be spent on dinners together.”

Things to look for during your budget checkup or money dates are areas where you’re exceeding the budgeted amount, additional expenses you could cut and how much progress you’ve made toward your big money goals.

Remember to celebrate your successes, even small ones, to keep yourself motivated.

Keeping the right mindset

When you’re not used to budgeting, you might be tempted to look at it as something negative that forces you to go without the things you want. Yet the opposite is true.

A successful budget helps you to map out your priorities and make sure that you have the money to turn those goals into reality. A sound budget could quite literally change your entire financial life for the better.

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