How To Budget: Save More and Spend Less by Organizing Your Money

What Is a Budget?

A budget is a method for organizing your money, including deciding exactly what items your income allows you to spend on. It takes into account the money that comes in and the money that goes out, making sure you’re allocating your funds correctly and not overspending. Budgets can help you make on-time loan and credit card payments, stick to a routine of proper spending habits, and ensure you save money.

Do I Need a Budget?

Anyone can benefit from learning how to budget money. But budget plans may be especially useful for young adults just learning how to manage money, those who struggle with overspending, people who want to save more, or anyone who wants to get more organized financially.

Creating a budget can help you form better fiscal habits if you grapple with spending and saving. Seeing the money that comes in and how it goes out is an easy way to evaluate where you might be able to make some changes, save more, and never miss a bill or loan payment.

You should consider making a budget if:

• You’re living paycheck to paycheck. If find yourself wondering where your money went each month, a budget can help you organize your expenses to see where you may be able to cut expenses and end the month with some money left over.
• Saving money is a priority. If you know you need to save money, but you haven’t exactly figured out to do it, a budget can help you figure out what expenditures you might be able to cut to put more money into savings.
• Your financial habits feel disorganized. If you’re missing loan and bill payments, don’t have routine banking habits or are getting into debt, sticking to a specific spending routine can help.
• You want to become more financially savvy. If words like Roth IRA sound foreign or you only know a CD as a vintage way to listen to music, budgeting can help. It’s never too late to learn more about how to manage your money. 

How To Make a Monthly Budget

Required items:

• A pen and paper
• A computer and a Microsoft budget template
• Or your phone with a budgeting app, such as YNAB, EveryDollar or Honeydue

Time to complete: One to two hours per month (maybe even less, once you get the hang of things).

Beginner’s Guide To Creating a Monthly Budget

Step 1: Figure Out Your Net Income

Before you can organize your spending, calculate how much is coming in each month. Make sure you note your net income, which is the amount of money you make each month after any taxes, insurance or savings deductions. 

Step 2: Note Your Monthly Spending

Once you know what comes in, it’s time to figure out what goes out, including both fixed and variable expenses. Fixed expenses (like rent or daycare) stay the same each month; variable expenses change (like groceries or dining out). Here are some key expenses you’ll want to make sure to note:

• Housing costs: What you pay in rent or your mortgage payment. Don’t forget to calculate any additional housing-related expenses, like condo maintenance fees, insurance or property taxes.
• Utilities: Electric, gas, internet and water
• Travel and transportation: Gas, transit or travel purchases 
• Loan payments: Personal loans, student loans, car loans, et cetera.
• Groceries and other necessities. This includes all of your everyday and weekly shopping needs like clothing, food and household supplies.
• Childcare or school. Write down these amounts for yourself if you’re in school or for your children.
• Monthly subscriptions and memberships: This includes magazine or streaming services, your cellphone bill or your gym membership.
• Leisure and dining: Activities like eating out and theatre tickets fall into this category.
• Healthcare: If this isn’t automatically deducted from your paycheck, note it.
• Children: Additional child-related expenses beyond school.
• Pets: Anything from vet expenses to food. 
• Savings: For retirement, for emergencies or just general savings.
• Big items: This might be new furniture, a wedding, a bicycle, a canoe, a nursery or anything else you foresee coming down the pipeline.

Step 3: Pick a Budget and Set Goals

There are different ways you can organize your budget, but once you know where your money is going, it’s time to reallocate it in ways that make more sense or benefit you financially. Here are some of the most popular ways to do your budget:

The 50/30/20 Budgeting System

This budget is particularly good for anyone who wants to save or repay debts. It allocates 50% of your money to necessary items (rent, groceries, gas), 30% to things you want (gym memberships, Starbucks, that flight to Puerto Rico) and 20% to repaying loans/debts and saving money.

The Envelope Budgeting System

For those who need a more hands-on system of budgeting, the envelope or cash-stuffing method works well for anyone who struggles with overspending or debt, especially on credit cards. Just write down your spend categories on envelopes and fill each with the amount of money you’ve allocated for that category. Once the money is gone, you can’t spend any more in that category that month.

Zero-Based Budgeting System

With the zero-based budgeting system, you plan to save or spend every dollar you make. That means tracking and categorizing all your expenses each month, including savings, paying off debts, covering bills and even entertainment costs and then allocating every penny you earn into those categories. By the end of the month, your income minus these expenditures should equal zero. This method is ideal for organized spenders who can meticulously note and stick to a strict budget.

Step 4: Automate Savings and Bills 

Reach your savings goals and never miss a payment by automating your bills, savings and payments each month. This way, your money is automatically deducted from your account, and you won’t forget about it. It’s a simple way to ensure on-time payments and to stick to your savings plan. 

Step 5: Set Goals, Track Progress and Revise As Needed

You may not get your budget just right on your first try, and that’s okay. You may have to add categories you forgot about or change methods to fit your personality and spending habits. See where you can cut down spend and save more, or decide if what you’re spending money on aligns with your long-term goals. For example, if you realize you’re spending a significant amount of money on dining out but want to buy a new car, you may need to make some changes in your lifestyle or your budget and goals to reflect that. A budget is a living document that changes frequently, so keep it up to date.

Once you’ve written down exactly what you spend, you may have to revise it as your spending and saving changes. Things like getting married, having children, going back to school, getting a new job/pay raise or getting laid off can also affect your budget significantly and require some changes.

Note that if you’re a freelancer or your income varies month to month, it’s important to set aside additional money or leave wiggle room in your budget for inconsistencies. 

The most important thing to know when creating a budget is to be honest and realistic when doing so. If your goals aren’t realistic and you aren’t honestly noting what you spend, it won’t work. But if you put in the effort to make a realistic budget and stick to it, you’ll be well on track to meeting your financial goals in no time.

Budgeting Example: The 50/30/20 Budget System

The following is a budget based on the 50/30/20 system or the zero-based budgeting system, which uses up all the money each month but includes savings and other investments.

The budget is based on a take-home, post-tax and insurance net pay of $4,000 per month for a single person renting a small apartment in a medium-sized city. This means $2,000 would be allocated to necessities, $1,200 to wants, and $800 to savings.