How to Budget Money (The Right Way) - Everything You Need to Know

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If you want to learn how to budget, then you’ve come to the right place! This guide shows you exactly how to budget money the right way so you have the best chance for success.

Unless you live under a rock, then I’m sure you’ve heard many times that you need a budget.

Does that statement make you cringe?

I hear you, and in fact, we not alone. In fact, only roughly 32% of Americans maintain a household budget.

Considering you are here, I bet you also know that budgeting is important if you want to be able to control your money so you can reach your financial goals in life.

Instead of dreading having to budget your money, let’s dive in an learn how to budget money the right way.

Benefits of Budgeting

There are many benefits of budgeting. We’ve already established that it is a way to control your money. Without a budget, your money is basically controlling you.

Think about it, if you are you living from paycheck to paycheck, don’t you think your money is controlling you? What happens when you get halfway through the week and start running short on cash?

You start to control your spending, so you have enough funds to last until next payday. Or worse, you end up using credit to supplement your bad spending habits…this is never a good idea.

Budgeting is a way to encourage you to live within your means. We all need to strive to live within our means because if we don’t, we are going to get into debt.

Living on a budget also helps you to identify and fix bad spending habits. When you start budgeting, you’ll realize pretty quickly what bad spending habits you need to fix.

Instead of wasting your money away on instant gratification, you are more likely to develop better money habits. Most importantly, learning how to budget money will allow you to reach your financial goals. Whatever those goals may be, if you have a plan to get there, you’ll be much more likely to achieve them.

Why You Need A Budget

You will have control where your money is going

It’ll allow you to stop living from paycheck to paycheck

It can help you to stay or get out of debt

You’ll develop better financial habits

Allows you to reach your financial goals

How to Budget Money

Knowing Your Income

The simple definition of a budget is an estimated income for a time period along with an itemized summary of planned expenses. So, the first step in creating a budget is knowing how much money is coming into your household.

This would include your net income or take-home pay after taxes. Your income would all your income including…

Work salary

Business or side hustle earnings

Alimony and child support

Investment income

If your income is irregular because your hours vary or you work on commission, then you’ll need to come up with a set amount to use. Basically, use the lowest amount you earn in a given month.

This way you know that you will be able to stick to your budget every month even if your income fluctuates. You can use any earning over the amount you set to build your emergency fund or save for major purchases.

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Identify Your Expenses

Now it’s time to come up with a list of all your expenses that you need to cover throughout the year. This would include…

Fixed monthly expenses

Variable expenses

Discretionary expenses

Intermittent expenses

Fixed monthly expenses

Expenses that you pay on a monthly basis that doesn’t fluctuate throughout the year such as…

Mortgage or rent

Loan payments

Cable

Trash removal (if paid monthly)

Monthly membership fees

Streaming services

Cell phone service

Emergency savings contributions

Variable expenses

Expenses that either fluctuates from month to month such as…

Groceries

Transportation

Personal care items

Household items

Discretionary expenses

This would include anything that you spend money on that isn’t a need.

Family outings

Entertainment

Eating out

Starbucks coffee runs

Alcohol

Movie nights

Intermittent expenses

Expenses that aren’t paid on a regular monthly basis. Instead, they are paid in intervals such as quarterly or yearly.

Annual membership fees and dues

Property taxes

Car

Insurance (if not paid monthly)

Subscriptions

Dog license

Vehicle registration

Holiday expenses

Home heating

Back to school expenses

The easiest way to create a list of all your expenses is to review all the expenses that you’ve had to pay for in the past.

Look through your bank statements for the last 12 months and just jot down everything and how much it cost. You can organize your expense list later.

If you don’t have all your statements, you can easily get copies of them through your bank’s online portal. You can even visit the bank and ask an employee to provide you with copies.

Types of Budgets

Now that you have all the information needed, it’s time to pick the type of budget you’ll focus on.

There are many ways to budget your money, two of the most popular are zero-based budgeting and the other is the 50-30-20 budget.

Zero-Based Budget

The zero-based budget, also known as the Dave Ramsey budget because it’s the approach he teaches. The premise is to create a plan for every dollar in your budget so that income, minus expenses equals zero.

Any income that is not allocated to pay expenses goes on debt repayment or into savings. The zero-sum budget approach is best for people who don’t mind or even relish being on a strict regimen.

50-30-20 Budget

The 50-30-20 budget rule is based around allocating a percentage of your income to a specific budget category.

So, 50% of your income should be allocated to pay for your needs. This would include most of your expenses such as mortgage or rent, food, insurance, loan payments, etc.

Then 30% of your net income could be allocated to your wants. This could include savings for vacations, cable, sports events, or anything else that is not a need.

Lastly, 20% of your income will towards your savings. The 50-30-20 budget is best for people who have a hard time sticking to a budget because it’s not as restrictive.

Balancing Your Budget

Once you know what type of budget you are going with, it’s time to compare your income to all your expenses. Do bring in enough income to pay for all your expenses, and set money aside for your savings? If so, Great!

If you don’t earn enough income to cover everything, then you have a budget deficit. The only two ways to deal with a deficit is to either increase your income or decrease your expenses.

Increasing your income

We all know what’s involved in earning more income. You can either work more hours at your current job, find work that pays more than you earn now or take on a side hustle.

Considering we are all so busy and it can be difficult to find more hours in the day, the easiest way to make a budget work is to reduce expenses.

Reducing expenses

You are going to need to find ways to reduce your expenses. Go through each expense that you added to your budget. Find ways to either get rid of expenses or cut back to save money.

First, start with your discretionary expenses because they are the easiest to cut back on. These expenses are made up of your wants and fun money. Ask yourself the following questions.

Do I really need this?
Can I reduce the amount it cost by downgrading
Are there cheaper alternatives that will save money
Can I cut back on the frequency to save (ie. eat out less often)

Now, I do have one word of caution here, don’t cut back on this expense category so much that you aren’t allowing yourself any fun or leisure.

It’s a good idea to cut back, but if you are so miserable, you may end up giving up. Instead, look for ways to save in other expense categories to make the numbers work.

Next, look at your variable expenses. Things like groceries, personal and household items can be really easy to cut back on with a bit of planning and effort.

Go through your expense list in the order below until you can balance your budget.

Discretionary expenses

Variable expenses

Intermittent expenses

Fixed expenses

Maintaining A Budget

Now that you know how to budget, and have balanced it so you can make ends meet, you should find a way to track your progress and maintain it regularly.

There are many ways that you can do this. You can use online tools, apps, forms, and spreadsheets. Really, it’s just a matter of preference as long as it works for you and your situation. Let’s look at some.

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Budgeting Tools

Personal Capital is a free online tool that helps you manage your budget with little effort. It allows you to link your bank account and/or debit and credit cards to your account.

Personal Capital automatically pulls in your spending information, which makes it really easy to see at a glance how you’re doing. You can set your categories and choose spending limits to customize it for your needs and situation.

Printable budget planner templates or spreadsheets are other options, especially if you are wary of entering your banking information online. There are tons of free budget template options available online.

Lastly, you can use the budget envelope system. This is a simple method if you prefer to use cash to pay for your expenses. There really is no best way to track your budget. Just pick a way that fits your needs and you’ll be good to go.

Budget tips for success

There is no doubt that you’ll run into some budget challenges along the way, especially if this is your first attempt. Don’t worry, this is totally normal.

The key is to keep trying until you get to a place where you are comfortable living on a budget. Here are some quick budget tips for success.

Create a realistic budget

One of the biggest reasons many people fail at budgeting is that they set unrealistic expectations for themselves. It’s not uncommon to want to create an ideal budget that allows you to save as much as possible.

The problem is that it’s just unrealistic to expect yourself to give up everything that brings you joy in life. You are not doing yourself any favors by doing this because eventually, you’ll get tired of living this way and give up.

Instead, create a budget that is realistic and that you can live with. Once you get used to it, you can slowly tighten the belt until you are at a place that works for you.

Adjust your budget

Things happen all the time that causes us to have to adjust our budget. We forgot to include expenses, an unexpected expense pops up, or we just get carried away at the moment.

This is ok, the key is to not let these things throw you off and cause you to give up. It’s a normal part of living on a budget. Instead, pick yourself up and dust yourself off, then adjust it accordingly.

Give yourself wiggle room

Allowing yourself a bit of wiggle room is a necessity. Little things are going to come up all the time. If you give yourself some wiggle room, you are much more likely to stay on budget without feeling like a failure when these things happen.

Save for major purchases

You know that you are going to need to make major purchases every once in a while. You’ll need to replace appliances in your home, you’ll have to upgrade your vehicle eventually, or you just want to treat yourself to something nice once in a while.

Instead of letting these things throw you off your budget, include them in it. This will allow you to save up for major purchases without giving up on your efforts.

Understand the difference between wants and needs

You need to understand the difference between needs and wants. Needs are the basic necessities that we all need, food, clothing, shelter.

Even though we need all these things, is a $400 pair of shoes necessary? Yes, we all need shoes, but when you take it this far, it’s a want. Especially when a $40 pair will do just fine.

How to Budget Recap

Know your income

Identify your expenses

Pick a budgeting method

Balance your budget

Pick a budget tool to maintain your budget

Review your budget periodically

How to budget conclusion

Budgeting takes time, you probably won’t get it right the first time and that’s ok. Everybody needs to rework their budgets every once in a while.

Follow the tips listed above and adjust as needed to fit your needs. Eventually, you’ll realize that this budgeting thing is not so bad once you get the hang of it.

Now go create your budget!