5 Steps to Create a Budget that Actually Works

it’s about allocating your finances for what really matters. You want to have more money for the things that are important to you while avoiding spending money on what isn’t important.

Plus, with life getting more expensive, staying on top of your finances will ensure you have enough money to cover your bills now, while also still enjoying yourself and planning for the future.

Once you get comfortable with budgeting, you’ll:

• Be able to plan for the future so that you’ll feel less anxious about what’s to come.
• Have more money for the things that you really care about.
• Stop wasting your time and money on things you don’t care about.
• Be able to plan for that dream trip, house, etc.
• Have more control of your life.

If you’ve been trying to figure out how to budget your money better, we’ve got you covered.

1. Set Your Budgeting Goals

Let’s face it, most of us can’t just save money for the sake of money. We need a purpose for our saving or else budgeting will feel pointless.

What are some good reasons to set budgeting goals?

• Saving up for a vacation.
• Paying off existing debt.
• Saving for a house.
• Planning for retirement so that you don’t have to work forever.

Tangible goals will make your budgeting easier — if you clearly know what you want to accomplish, you’re more likely to commit to it.

You’ve probably heard about SMART goal setting, and it’s a good idea to use it for setting your budget:

• Specific. What do you want to save for?
• Measurable. How much do you need to be saving from every paycheck?
• Achievable. Is it even possible to reach this financial goal or is it a dream?
• Realistic. Can you reach this goal with your current income and expenses?
• Time-bound. When will you reach this goal by?

You want to set your financial priorities while still being realistic enough that you won’t give up on the whole thing when an unexpected expense crops up.

Once you figure out why you want to budget or save money, it’s time to move on to the next step.

2. Know Your Fixed Expenses

Before you can start planning how you’ll budget your money, you have to figure out your fixed expenses. This is so you’ll know know how much money you absolutely have to pay out every month, regardless of any changes to your income.

Your fixed monthly expenses could include the following:

• Rent or mortgage.
• Utilities.
• Insurance.
• Loan payments (student loans, auto loans, etc.).
• Minimum credit card payments.
• Desired savings, investments, or additional debt payments.

That last point is especially important. You must calculate how much you want to save, invest, or use to pay down debt first. If you’re setting aside a bit of money but still paying high interest on lingering debt, or saving for a trip but have nothing in case of emergency, then you’re not really getting ahead with your finances.

Once you know your fixed expenses, determine what’s left. This is your “spending allowance.” You can spend this on whatever: take-out, wine, travel — basically anything that makes your heart sing.

To find what’s left, do the following:

• Total your fixed monthly expenses.
• Figure out your monthly take-home pay.
• Subtract your fixed expenses from your take-home pay.

Of course, if something big happens (illness, car repairs, etc.), you may need to spend money on that and have less for fun stuff. That sucks, but it’s also why you should always have an emergency fund.

3. Track Your Spending

You have to know where your money’s going if you want to get better with budgeting.

Your fixed expenses will roughly remain the same every month. However, your variable expenses will always fluctuate, as they depend on your spending habits (lifestyle, eating out versus cooking, and so on).

This is why we have to track our spending: to see exactly what our variable expenses are costing us.

For one month, track your spending without making any changes to your normal buying habits. Then, at the end of the month, take a look at where your money went.

Once you’ve tracked your spending for a month, review to see where your cash went and where you can cut back. We all have financial leaks that can be filled when we take a realistic look at our spending.

Keep in mind that you don’t have to cut back on everything. You just have to work on removing the purchases that don’t match the goals and values you set in Step 1.

How can you track your spending?

• Old-school spreadsheet.
• Budgeting apps.
• Your credit card.

Since everything is digital these days, it makes sense that budgeting your money can go digital, too. Sure, you can use an old-fashioned spreadsheet (and you may prefer the accountability of manually tracking everything). But if you’d prefer something more high-tech, opt for an app.

Instead of manually evaluating your spending to make sure you stay on track, budgeting apps monitor and analyze your spending. This, in turn, can make it easier for you to see where your money is going, and adjustments you can make to improve your cash flow.

One of our favorite budgeting apps is Mint, which connects to all your financial accounts to help you monitor your spending. The Mint app allows you to set financial goals and you’ll receive updates and reports to let you know how much you’ve progressed. 

Read more: Best Budgeting Apps to Take Control of Your Finances

For another digital option that’s even more automated, you could go the credit card route. Be warned, though: you’ll only want to do this if you’re certain you can pay off your credit card balance in full every month.

Making all your purchases on your card gives you a one-stop shop for tracking your spending. You can automate your fixed expenses to your credit card while also tracking the rest of your variable spending in one place.

Read more: Credit Cards Can Be Your Most Powerful Budgeting Tool

4. Embrace Frugal Living

One of the most important steps when budgeting your money is learning to embrace frugal living, so that you’re able to reach your financial goals without feeling limited.

What are some practical tips for living more cheaply?

• Prepare more meals at home.
• Find ways to cut back on your grocery bill.
• Keep your eyes open for deals and promotional offers.
• Look for free events in your community so that you don’t break the bank on entertainment.
• Consider cutting one fixed expense that you don’t use that much.
• Find free or low-fee banking options.
• Avoid common money wasters (late fees, lottery tickets, impulse purchases, and food that will end up in the trash).

Based on the spending habits you tracked in Step 3, you should be able to spot some areas where you can embrace a more frugal attitude — so that you can stay focused on the financial goals we planned earlier.

 5. Pick a Budget Method

The beauty of running the numbers and actually tracking your spending is that it makes it easier to execute those SMART goals. Once you know how much money you have coming in and out, you have a better grasp of how to budget your money.

There are dozens of budgeting methods out there, but one of the most popular ones is the 50/30/20 method. It breaks down as follows:

• 50% of your income on fixed expenses (rent, mortgage, groceries, etc.).
• 30% of your income on wants and lifestyle choices (fun and entertainment, dining out).
• 20% of your income toward debt payments and saving.

Now, of course, your income may not fit into this model. If 50% of your salary goes to rent alone, then it’s going to be hard to work in anything else.

But that doesn’t mean you should give up on your financial goals completely. There are plenty of other budgeting options out there (including some unusual budgeting methods), so use what works best for you.

Use an App Like YNAB to Plan Ahead

As we mentioned, you’ll be more likely to budget if you have a goal in mind. Which is why you need to always be thinking ahead.

For a bit of help with this, opt for a budgeting app that enables you to forecast your goal timeframe based on your current financial information. You’ll input your expenses, your income, and your goals, and then the budgeting app shows you how long it would take you to save up for a specific goal.

A particularly good app for this is YNAB. Similar to Mint, YNAB connects directly with your bank account, making it ideal for tracking your purchase habits and getting reports on where your money is going.

Under the YNAB method, you give every dollar a “job” and then adjust as needed between paydays/inflows of money. The “To Be Budgeted” box at the top of your YNAB display shows you how much money has come into your account that hasn’t been assigned a job. The goal is to always have TBB at $0.00.

Even though YNAB connects to your bank account, you don’t just see your current available balance like you would on your bank statement or banking app. Instead, YNAB takes your available balance and subtracts any transactions you’ve logged (such as the jobs you’ve assigned to your money), even if they haven’t hit your bank account yet. This gives you your “working balance,” which is how much money you actually have. If you use your working balance to make spending decisions instead of the total in your bank account, you’ll avoid overspending.

The Bottom Line

Here’s the main takeaway of this article: budgets without a purpose won’t work. We simply won’t stick with them if we don’t have a tangible reason to.

Instead, give a reason to your budgeting. Whether you’re saving up for a one-off trip or for your future retirement, you need to align your budget goals with your values.

Then, set a spending plan after figuring out how your fixed expenses compare with your income and financial goals. Cut out whatever isn’t necessary or important to your goals.

Lastly, use an app or spreadsheet to track your money and keep planning ahead, with a fluid approach that allows you to adjust your spending as your bank account grows.

Read more:

• 6 Ways to Trick Yourself into Saving More and Spending Less
• What Does a Realistic Budget Look Like?