How to make a budget (2024)

Learning how to make a budget — and actually stick to it — requires dedication and adaptability. You need to set goals that are based on your income and spending needs, while also realzing that life happens from time to time. By keeping perspective on your long-term goals, you’ll be able to adhere to a budget in both good harvests and bad.

How to build a budget

1. Add up your monthly income

You must have a pretty good sense of how much money you’re taking in each month before you can know how much you’re able to spend. The task is relatively simple if you’ve got a steady income, but can be a bit more difficult if you’re self-employed or string together a series of side hustles.

One option is to divide your previous year’s income by 12 to come up with an average.
For a more financially conservative estimate, you can find the lowest amount you earned in one month last year (or the lowest amount you expect to earn this year). Likewise you can estimate how much you’ll earn in the months to come, and revise as the results become apparent.

2. Add up your monthly expenses

Once you know how much money you’re working with, figure out how you’re currently spending it.

Start by taking note of all of your fixed, necessary monthly expenses such as rent or mortgage, health insurance and loan payments. It’s easiest to start with fixed expenses, which remain the same month after month, before moving on to items that shift each month, like groceries and gas.

To establish a baseline for these variable expenses, review the previous two or three bank statements or credit card bills. Remember, you’re trying to establish a reasonable goal, not predict an exact number.

To make your life easier, consider using budgeting apps, such as You Need a Budget, which allow you to easily track and categorize your spending over several months once you’ve synced your cards.

“When tracking actual expenses, in this day and age, there is no need to collect every single paper bill,” said Isabel Fliss, a registered investment advisor at McKague Financial in Detroit.“Banking apps collect all transactions completed with credit or debit cards that you can easily download and effectively analyze”

3. Set realistic goals

“To begin the process of budgeting, it is important to set realistic goals, otherwise, it is likely that you will get frustrated and give up budgeting entirely,” said Fliss.

If you’re used to spending, say, $500 a month dining out, it’s unlikely you’re going to suddenly spend $100 now that you’re budget conscious. Moreover, if you fail to live up to your overly ambitious goals, you may lose faith in your ability to control your finances.

Start by cutting your bill by, say, 10%, and then put those funds towards good use, perhaps by building your emergency fund or paying down debt.

4. Track your finances

Tracking your progress is key to spending within your means. Once again, budgeting apps make this process easier, especially by enlisting automatic spending alerts, but you could also create a bespoke process (upload all of your transactions to excel, say) that dovetails with your preferences.

In either case, establish a routine to check in with your goal progress (weekly or monthly). This way you can also celebrate certain milestones when you reach them. Make sure you do so even after a particularly expensive bout of shopping.

5. Be disciplined, but adjust as necessary

Being disciplined and sticking to your budget is important, but there is no rule that says you have to lock into your budget for a long period of time.

“A good rule of thumb is to track your income and expenses on a monthly basis, review the results and adjust [your] budget if needed,” said Connor Spiro, senior financial consultant at John Hanco*ck.

A budget is a “living” document — it can change based on your needs and goals. If one of your kiddos suddenly wants to do a school sport and needs equipment, you could move some numbers around for a short term.

Why budget?

Creating a budget helps you perform the most fundamental task in personal finance; spending less than you make. Ideally you can put those savings to work in a high-yield savings account or one of the best CDs, so you can enjoy a bit of interest.

Why is it important to spend less than you make? You’ll avoid costly debt, be able to afford bigtime purchases, like a car or a home, and live without the fear of running out of money each month.

It’ll also make it easier to retire. By accustoming yourself to a cheaper standard of living now, you’re responsible for saving less money to cover your future expenses when you’re no longer earning an income.

Tips and tricks to make budgeting easy

1. Remember why you’re budgeting. Before making a purchase or refreshing your budget, don’t forget to circle back to your “why.” When facing something you want a lot, it’s helpful to remember that there’s something you want more.
2. Use the right tools. You don’t have to go it alone with only pencil and paper. Download a budgeting app, automate savings deposits and use spending alerts to stay aware of how much room is left in your budget for the month.
3. Be efficient in spending for fun. It gets really hard to stick to a budget when it sucks all the joy out of life. Find ways to have fun without spending a lot. You and your family or friends could attend free concerts in the park, host movie nights at home with fancy popcorn or go on a long weekend hike.
4. Have an emergency fund. If you don’t already have an emergency fund, work on saving three to six months’ worth of living expenses. That way, if you get hit with an unexpected expense (like a medical bill), you don’t have to put it on the credit card or take out a high-interest loan.
5. Make budgeting habitual. “Tracking your budget on a specific frequency — i.e. weekly, monthly, bi-monthly, etc. — can help you turn the exercise into a habit, which generally makes it easier to stick to,” Spiro explained. Once you build a track record of your expenses and spending habits, it can also become easier to identify opportunities to improve.

Frequently asked questions (FAQs)