How to Make a Budget That Works for You

Creating and sticking to a budget is an essential part of financial wellness. Being able to see how much money is coming in and going out each month can help you manage your money with confidence.

To some, the idea of budgeting may feel restrictive, as if you have to cut back on doing things you enjoy. But it doesn’t have to feel that way. Think of budgeting as a way of creating a spending plan for things that are meaningful to you.

Ahead, we’ll share a few tips on how you can put together a budget that works for you.

1. Choose a budgeting method

There are many budgeting methods you could take, such as the 50/30/20 rule, goals-based budgeting, and envelope budgeting. Before deciding on an approach, think about what you’re trying to accomplish with your budget.

Are you trying to set aside extra money for a specific goal like a down payment? Or perhaps you simply want a better view of how you’re spending and saving each month.

Understanding why you want to budget in the first place can help you choose an appropriate budgeting method.

2. Start with your discretionary income and build a spending budget around it

No matter which method you choose, creating a budget typically starts with figuring out how much income you expect to bring home each month. For many people, your net income is usually your take-home pay (after taxes, deductions, etc.). If you’re a freelancer, you can work with a ballpark figure.

After determining your net income, you’ll need to identify your essential expenses like groceries, bills, as well as mortgage or rent payments, so that you can arrive at your discretionary income.

Your discretionary income is what you have available to save and spend on what you want after your essential expenses are accounted for. In other words, your discretionary income essentially tells you how much money you have left to work with as you set your budget for your spending categories.

3. Determine your spending categories

Spending categories can include dining out, travel, shopping, subscriptions, etc. Keep in mind that no two budgets are going to look the same. Your budget should reflect your lifestyle, so make it personal by focusing on categories that matter most to you.

If you’re creating a budget for the first time, you may have to test and adjust the spending categories and numbers a bit. The important thing is to be realistic as you set your budget for each category. If you start too low, you might make it harder on yourself to stay within budget.

Once you’ve set your budget for your spending, try your best to commit to it. You can always make changes down the road. And if you do find yourself overspending every once in a while, don’t worry - it happens. The important thing is to be mindful and not make a habit of it.

4. Make room for your savings

Spending is only one part of your budget. Don’t forget about your savings. If you were to adopt the 50/30/20 budgeting method, then 50% of your take-home pay should go towards essentials, 30% towards wants, and 20% towards savings.

Whatever your savings target might be, a good rule of thumb to follow is to “pay yourself first.” This is where you automatically save a portion of your net income each month for your financial goals.

Automating your finances is a great way to build your savings without having to remember or force yourself to put a little away each month. Some people like to time their automatic transfers based on their pay schedule.

That way, every time you get paid, you get into the habit of saving a part of your paycheck. You’re basically funding your savings goal(s) before you have a chance to spend that money on something else.

Consider putting your savings into a high-yield savings account, where you can put that money to work earning interest. To learn more, see our Guide to Savings Accounts.

5. Review your budget regularly and make adjustments if necessary

It can be easy to set a budget and forget about it. But it’s important to review and update your budget periodically. After all, your income and your needs can always change.

Make adjustments whenever you need to. Budgeting is about making a plan that works for you, and it’ll naturally have to be updated from time to time depending on where you are in life.

That being said, try to avoid making dramatic changes to your budget after just one or two weeks. Consider monitoring your budget for a month or two. That way you can spot trends and then figure out what updates need to be made.

If you find yourself consistently going over in a specific category, see if there are dollars you could redirect from another category. Again, you shouldn’t feel bad if you overspend once in a while. Budgeting is about trial and error, especially if you’re not used to working with a budget – it takes time to find the right balance between spending and saving.

6. Consider using a budgeting app

There are many budgeting tools and apps you can use to track your spending and build a budget. Explore your options and see if there’s one with features that appeal to you. Many apps can help you better visualize and analyze your money habits.

The level of customization will depend on the app. Some apps allow you to add your own spending categories and create a budget for each. There are also apps that can help you set goals like saving for an emergency fund or paying off debt.

Look for an app that’s easy to use and makes sense for your needs. If you find one that you enjoy using, it may even help you stick to your budget!