How To Budget Money: Tips And Tricks For Creating A Budget That Works For You

While it might feel overwhelming to set up a budget, or maybe you’re worried it will feel too restrictive, using a budget is an important step to reaching your financial.

Let’s go over all the things you need to know to create a successful budget that works for you and your finances.

How To Make A Budget

Many people want to make a budget or spending plan, but often don’t know where to start. Here’s your definitive guide to creating a budget that works for you.

1. Examine Your Monthly Income

To create a budget, you first need to know how much money you have to work with.

Start with your regular take-home pay. Check your recent pay stubs to see what your income was before taxes, insurance, retirement or any other automatic deductions were made. Most people prefer to budget monthly because that’s when major bills are due. If you’re paid every other week, you can arrive at your monthly income by multiplying your paycheck by 26 and dividing by 12 (for 12 months in the year).

If you don’t make a fixed amount each pay period (if you’re paid hourly, if you have a commission-based salary, if you’re a freelancer, etc.), look at several months of pay documents to get an idea of your pay range. Basing your budget on the lower end of that range will keep you from overspending in leaner months and give you a nice buffer when you bring in more than expected.

Don’t forget other forms of income, such as earnings from a side job, rental income, alimony or child support.

2. Categorize Your Spending

Next, look at what you spend month. If it helps, separate your spending into categories. The budgeting app Rocket Money can also be helpful here by tracking previous month’s expenses and providing an average as you set up budget limits for each category.

Ultimately how you categorize your spending is up to you, but all your monthly expenses can usually be put in one of three buckets: needs, goals (saving, debt and investments) and wants.

Needs

Your needs are the basic things you need to survive and stay afloat like housing, transportation and groceries.

The specific items and categories that belong in the “needs bucket” will vary slightly from person to person, so take some time to think about what your basic necessities are.

How you allocate funds for your needs depends on your circumstances. For example, depending on your housing market, financial experts say that you should ideally spend no more than 30% of your monthly gross income on your housing.

Instead of basing your monthly budget on rules of thumb, figure out what works for you and your lifestyle.

Financial Savings Goals

This bucket includes saving for emergencies, retirement and debt payments.

Having a solid savings account is a big part of being – and staying – financially healthy. If you currently have no savings, your first goal should be to build an emergency savings fund. This is a savings account that holds at least 3 – 6 months’ worth of basic living expenses.

Having a solid emergency fund can not only help you stay afloat if you lose your job or encounter similar financial trouble, but it can also prevent small inconveniences from becoming big problems. If your car ends up needing an emergency repair, having money in your savings account could mean that you can pay for it without having to take on debt.

Next comes retirement savings. No matter how young you are, it’s never too early to think about retirement. Decide what percentage of your net income you can comfortably apply to this goal. Due to compounding interest, the earlier you start investing in your retirement, the better.

If your company offers a 401(k) with some sort of match (i.e., your employer contributes money to your 401(k) based on a percentage of your own contributions), not taking advantage of that means you’re leaving money on the table.

If you have debt, you’ll want to have enough space in your budget to make your minimum payments and avoid hurting your credit. If you’re spending lots of money each year on high-interest debt, you might want to prioritize finding a debt reduction method that can help you pay down your debt quickly and efficiently.

Once you’ve figured out how you want to prioritize these goals, you can start thinking about other financial goals you want to achieve. This includes things like buying a home in 5 years, saving for a wedding in 2 years and going on vacation next summer.

Since you may have more than one financial goal, you’ll have to create a strategy to achieve them. Long-term goals often cost more, but because you have more time to save money, you probably don’t need to save as aggressively.

Not sure how much you should save for each goal? Using Rocket Money’s Smart Savings feature, you can easily have savings transferred little-by-little to each of your custom goals, based on your spending habits. By automating your savings you’re much more likely to reach your goals faster.

Wants

Everything else in your budget goes into this bucket, sometimes referred to as personal or discretionary spending. It includes things like new clothes, eating out, entertainment, gifts and other items and services that aren’t essential but bring joy to your life.

Deciding how much to spend on the items within this budget is a highly individual decision and will come down to what’s important to you and what you can afford.

4. Tracking Your Spending

Before you decide how to spend money going forward, you should get an idea of how you’ve been spending it so far. That way you’ll know what you tend to spend your money on and what areas should be cut back. The Rocket Money^SM app can automatically track your spending across categories for you.

If you’re not into using technology, go back over past spending using your recent bank statements. If you have trouble retroactively tracking your spending, spend a month or two monitoring what you spend your money on. Write everything down or find a service that will show you what you’re spending the most money on.

5. Audit Yourself

There are two ways to make room in your budget: cutting and adding. Because it’s easier to cut spending from your budget than to add money, you should scrutinize your budget for areas where you could be spending less. For example, it is usually easier to limit your spending by unsubscribing from some streaming services than it is to get a raise or a better paying job.

Determine Where You Can Reduce Spending

Look at your spending habits. Cutting out meals at restaurants might not make a huge difference if you’re only eating out once a month, but if you’re eating out multiple times a week, you’ll probably save quite a bit of money by cooking at home more regularly.

Find expenses that you won’t miss, like your cable subscription or an excessive cell phone data plan. You can also use Rocket Money to find and cancel unwanted subscriptions, or even lower a bill for you with our expert team of negotiators.

Reevaluate Your Needs

If the cost of your basic needs is out of proportion with what you’re making, you may need to make lifestyle changes such as carpooling, buying groceries in bulk when there is a sale or getting a roommate.

With shorter-term goals, figure out the math to know what to save and what to cut from your budget to help reach these goals.

6. Budget For Variable Or Irregular Expenses

To budget for irregular expenses, it might be helpful to open a savings account specifically for these costs and contribute a little bit each month. Examples of irregular expenses include things like:

• Birthday gifts
• Increases in insurance premiums
• Electric bills after a heat wave
• Car maintenance
• Back-to-school shopping

By setting up what’s called a “sinking fund” you can contribute to these expenses on a monthly basis and use the funds from your designated sinking fund to pay for the cost when it comes your way.  

Types Of Budget Plans

Now that we’ve gone over the elements that go into making a budget, it’s time to get into the nitty-gritty of actually creating one.

Let’s look at some of the different types of budgets you can use and go over some other tools, methods, and resources you can enlist to help you stay on track.

Use A Budgeting App

In addition to creating a budget that will work for you, the Rocket Money app can be a great tool to help you take control of your finances. Rocket Money helps you better evaluate your monthly income and spending habits by tracking accounts, monitoring subscriptions and more. Using the app can empower you to make more informed decisions about your finances, and you may even be able to save money in the process.

Budget Spreadsheet

A quick online search will render many results for budget spreadsheet templates, including options for both monthly and annual budgets. You can download any existing templates that you think will work for you or use them as a starting point and modify as necessary. Remember, there’s no right or wrong budget spreadsheet, it’s all about finding one that will meet your needs.

50/30/20

The 50/30/20 budget is a formula for how to allocate your budget spending. It works like this: 50% of your income goes towards needs, 30% goes to wants and 20% goes to savings. While these specific percentages might not work for you, finding a ratio that does make sense for your income and needs can help keep your different areas of spending in check while allowing for some flexibility within the categories.

The Envelope System

The envelope system works by forcing you to stop spending when you’ve reached your budget limit for a particular category. You can use it for just a few categories that you tend to overspend in (like groceries or entertainment) or for most of your budget.

For every category you want to budget for, fill an envelope with the amount of cash you’ve determined you can spend on that category. Once the envelope is empty, you can’t spend any more money on that category for the rest of the month.

Automate Everything

The fewer decisions you have to make when it comes to your money, the easier it will be to stick to your budget.

Several banks allow you to automate how much of your paycheck to put into your savings and investment accounts. Not only can this help ensure that you stay on track with your savings goals, but you’re less likely to miss money you never even get to see.

The Bottom Line On Budgeting Your Money

Budgeting might seem like a tedious task that requires a lot of planning and math, but it’s really just being more purposeful about spending money. By being conscious and goal-oriented in how you handle your money, you’re helping ensure your financial health and provide security for your future.

Having a budget is just one important aspect of improving your financial health. If you’re ready to get started, download the Rocket Money app today.