How to Build a Budget
Points of Interest
Creating a budget doesn’t have to mean complex spreadsheets or tons of different categories. You can set your budget with big-picture buckets for essential expenses, savings and general spending to get started.
Do you ever get to the end of a month and wonder where all your money went? You set lofty goals prior to the start of the month and committed to saving more, but then consistently find yourself in the same predicament.
Well, you’re not alone. Charles Schwab’s 2019 Modern Wealth Survey found that 59% of Americans live paycheck to paycheck, but you can break the mold — you just need to know how to budget. Creating a budget can help you take control of your spending and find money to save so you can escape the paycheck-to-paycheck rat race.
5 easy steps to build a budget
Step 1: Know your average after-tax income.
Before you can limit your spending and start building your savings account, you need to know what you bring in every month. Take your average after-tax income over the last six months as your baseline. Include everything — your paycheck, tips, side income, etc. — to make sure you have an accurate number when creating a budget.
Step 2: Determine your essential monthly expenses.
Next, you need to know how much your basic necessities cost. These are must-spend categories, and while you may be able to trim them down, they can’t be cut entirely. Dig through your bills, bank statements and credit card statements to figure out what you’re spending each month on:
- Housing (rent or mortgage)
- Insurance (home, car and medical)
- Minimum debt payments
Steps 3: Set money goals.
Next, consider your savings goals. They could include paying off debt, taking a dream vacation, building your emergency fund or something else entirely. Write down how much each goal costs and the finish line date. Divide the total cost of each goal by the number of months between now and the finish line to figure out how much you need to save for it each month.
Step 4: Determine your monthly spending buckets.
You don’t need to create a budget with 43 different categories to track — that’s where a lot of people get hung up. Keep it simple at first with three categories: living, saving and spending. Remember, your monthly income is your baseline. Fill in your living bucket with your essential expenses, then put your monthly savings goal into the savings bucket. Whatever is left from your monthly income goes into your spending bucket.
Step 5: Change your spending habits.
You probably spend a lot more on non-essentials each month than your new budget allows. Continue tracking your spending and pay attention to how much is coming out of each bucket every month. Save first before spending money on non-essentials so you’re always working towards your goals. It will take time to curb your habits, but with dedication, you can make a massive change.
Or try the 50/30/20 rule with the three-bucket strategy. With this rule, your buckets will be 50% for essentials, 30% for non-essentials and 20% for savings.
Tools to help with your budget tracking
Don’t feel too overwhelmed by having to track your purchases and keep up with your buckets. There are some great tools that connect to your accounts and track everything for you. You just need to open the app from time to time to see how you’re doing and categorize expenses.
- Mint — Mint began as a budgeting app but has evolved into a full-on personal finance workhorse. You can set your budgets and connect your checking, savings, investment and credit card accounts to automate the whole process. It will categorize your transactions for you, but you’ll probably want to go in and adjust them — it isn’t always the greatest at putting your expenses in the buckets you want.
- Personal Capital — This app is similar to Mint, but with a focus on investments and net worth tracking. You can use it to set a total monthly spending budget and track your spending over time.
- You Need a Budget (YNAB) — This is probably the best tool for budgeting out there. It helps you reach a goal of spending money that is at least 30 days old (breaking out of the paycheck-to-paycheck rut) by creating a budget where every dollar has a job. Unline Mint and Personal Capital, this budgeting tool does cost some money to use — it’s free for the first 34 days and then costs $84 per year.
- Spreadsheet — Don’t rule out a spreadsheet as a budgeting tool. While it requires a little more work, you can make it look and function exactly how you want without worrying about an app messing with your budget categories.
Money hacks to stay on budget
Sticking to your budget will be tough at first, and you’ll probably figure out that it doesn’t feel like you have enough to live a rewarding life and still reach your savings goals. You have two choices to help you stay on track — increase your income or decrease your expenses. You can try these money hacks to help you do both and keep your budget every month.
Increase your income
- Pick up a side hustle in your free time.
- Sell items on Etsy.
- Become a freelance writer.
- Drive for Uber or Lyft.
- Rent out a spare bedroom on Airbnb.
- Walk your neighbors’ dogs.
- Sell items from around your house.
Decrease your expenses
- Buy a used car with great fuel efficiency.
- Compare insurance rates.
- Keep your house warmer in the summer and cooler in the winter.
- Meal plan and buy groceries in bulk.
- Refinance your mortgage.
- Consolidate debt.
- Find free activities to do with your family.
- Cancel subscriptions you don’t use.
Increasing your pay for your day job is also an effective method to boost your income, but it won’t be a quick turnaround. You can either negotiate a raise or work toward a promotion with your current employer — or you can start searching for a new job with a higher pay rate.
The final word
Taking control of your finances and reaching your money goals doesn’t have to be rocket science. Once you know how to make a budget, you can make changes to your spending that will help you break out of the paycheck-to-paycheck lifestyle. Budgeting will help you breathe a little easier by helping you understand what spare cash you have and where the rest of your money is going every month.