For many consumers, the key to a healthy financial life is the ability to stick to a carefully crafted budget.
Not only does it help ensure you have the money you need for necessities like food or rent, but it also helps you bring dreams to life and prepare for the future.
“A budget is about helping you achieve and do the things you want,” Kyle Enright, president of Achieve Loans, says. “Goals could include everything from taking a vacation and buying a new TV to funding a child’s college education and retirement — and even making sure to have time to pursue a favorite hobby.”
But where should you start? Read on to learn how to create a budget — and stick to it.
What Is a Budget?
A budget is an organizational tool that helps you identify how you want to spend your money, Douglas Boneparth, financial advisor and president of Bone Fide Wealth in New York City and co-author of “The Millennial Money Fix,” says.
To create one, you need to track two things: your after-tax income and your expenses.
At the most basic level, you want your monthly expenses, including savings deposits and debt payments, to amount to less than your take-home pay. After you’ve accomplished that, you can adjust your spending to achieve your desired goals.
[READ: Easy Ways to Pay Off Debt.]
How to Make a Budget
According to Enright, making a budget should start with determining your short- and long-term goals. The why behind your budget. This can include everything from a purchase you want to make for your home to how much you want in savings when you retire.
“You’ll revisit and modify both goals and budget month to month, year to year, throughout life, but approaching budgeting this way will dramatically up the chances you’ll stick to the budget — and allow you to achieve your goals,” Enright says.
Calculate Your ‘Money In’
After you’ve determined what you hope to achieve through your budget, it’s time to create it. That starts with determining your take-home income.
“Add up all monthly net household income, the amount left after taxes and other paycheck deductions. This may include contributions to retirement plans and any medical insurance premiums you pay. The total is how much you have to spend each month,” Enright says.
Calculate Your ‘Money Out’
Once you know how much income you have to work with, it’s time to move on to calculating your ‘money out,’ or expenses. During this step, you’ll add up all of your regular expenses, such as the amounts you spend on rent, bills, gas, groceries, savings and debt repayments.
Enright recommends breaking ongoing monthly expenses into four categories: fixed expenses, variable expenses, savings and debt repayments.
Don’t forget to consider any expenses that don’t occur every month, like insurance payments or annual membership fees. You’ll need to either build in a buffer to account for them the month they’re due or divide by 12 to include the cost in your general monthly budget, Enright says.
Adjust Spending Targets by Category
After you’ve calculated all your money in and money out, you can start making adjustments. Many experts recommend following standard percentages for wants, needs and savings.
“A common rule of thumb is the 50-30-20 rule,” Kerrie Saephanh, founder and certified budget coach at Mindful Budgets, says.
“The idea is that you divide your net income into three categories, spending 50% on needs, 30% on wants and 20% on savings. Keep in mind that this is a generic rule meant to be a starting point, and these percentages will change based on your cost of living, goals and income level,” she adds.
If you live in an area with a higher cost of living, for example, you’ll likely need to use a different model.
“Someone renting an apartment in Manhattan will have a much higher percentage of income going toward rent than someone renting a similar-sized apartment in a small city in the Midwest,” Enright says.
Michael Collins, certified financial advisor and professor at Endicott College’s Curtis L. Gerrish School of Business in Beverly, Massachusetts, offers a breakdown with a bit more allocated for housing and a bit less for savings. He recommends allocating:
— 40% for housing (including rent, mortgage, utilities, etc.)
— 10% for savings
— 10% for transportation (car payments, gas, etc.)
— 10% for food
— 10% for entertainment
— 10% for clothing
— 10% for miscellaneous expenses
A good starting point is to see how your spending breaks down by category and if you’re on track to achieve your goals within timelines that work for you. If you’re not, you can make adjustments to align your spending with your goals.
For example, if you’d like to save up for a down payment on a home faster, you might cut back on spending on entertainment and miscellaneous purchases for a set period of time.
[Read: This Is the One Thing Americans Refuse to Stop Spending On]
Review Your Budget Regularly
Budgets typically aren’t set-it-and-forget-it systems. You’ll need to review yours regularly to make updates as your income, expenses and priorities change.
Enright recommends scheduling a budget review at least once per month, though weekly or biweekly reviews can be helpful when you’re just getting started.
“If you’re part of a couple, make sure to set your goals and review the budget together. This avoids talking about the budget all the time while ensuring dedicated time to maintain focus,” he says.
Budgeting Tools to Use
All of this might sound complicated, but there are lots of tools you can use to track your budget.
Once you’ve set up your budget percentages, you can use a budgeting tool or app — like YNAB (You Need a Budget ) or Goodbudget — to help keep track of your spending. YNAB is a zero-based budgeting app that’s very popular in the personal finance community, Saephanh says.
“Though there is a bit of a learning curve, it’s a highly effective way of understanding where your money is going and making a plan for where you want it to go in the future,” she adds.
“These tools help you track your spending, set up budget categories and receive helpful alerts when you’re overspending,” Collins says.
[READ: 10 Simple and Free Budgeting Tools.]
Tips for Sticking to Your Budget
“Sticking to a budget is the hardest part. Just like building any new habit, creating systems will set you up for success,” Saephanh says.
It’s easy to divide expenses into categories on paper, but changing your spending habits is a much more challenging task. Saephanh recommends new budgeters start small rather than trying to slash spending.
Additional tips for successful budgeting include:
— Use tools that are easy for you to understand: If your budgeting software requires a lot of math or data input, you’ll be less likely to stay on top of it. “Choose what’s most comfortable,” Enright says. Saephanh recommends pinning your app to your phone or browser’s home page so it’s in front of you every day.
— Holding yourself accountable: “Start budgeting with a friend, find online communities to join budget challenges or hire a budget coach to set you up for success,” Saephanh says. This makes you accountable to stick to what you started.
— Pay with cash: While using a card to check out can be easy and convenient, it doesn’t have the same emotional response as handing over cash, Enright says. He suggests trying to make your purchases with cash only for a month and see if you save any money.
— Make savings an expense in your budget: While saving 20% of your income might not be feasible for everyone, putting away money in case there’s an emergency is still critical. Enright recommends you build it into your budget as an expense so you treat it like the priority it is. When you treat savings like a bill you must pay, you’re much likelier to save,” Enright says. “Leaving savings to ‘whatever’s leftover’ usually results in little to no savings,” he adds.
— Automate where you can: Many bank apps allow you to set up automatic transfers to savings accounts. If your income comes in on a regular schedule, consider doing it so you don’t even have to think about moving money to savings.
While some people thrive using spreadsheets and tracking every expense carefully, others work better with automated savings and tracking tools. With a bit of budgeting experimentation, you can find what works best for you.
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How to Make a Budget and Stick to It originally appeared on usnews.com
Update 09/03/25: This story was published at an earlier date and has been updated with new information.
