How to Build a Budget That Works for You

Whether you’re looking to make a big purchase or think it’s time to take control of your finances, building a budget is a smart first step. Learning how to budget isn’t necessarily about restricting the enjoyable things you spend money on. It’s about having an understanding of where your money is going and if it matches your goals and values.

There are lots of budgeting styles and rules out there, but here a few tips to help you get started as you think about how to make a budget:

Know where you stand

Just like reading your credit report is a key to building healthy credit, you need to know where you stand in order to make progress on your financial goals. You may know how much money you have coming in each month. But do you also have a sense of what you’re spending money on? There are many good apps that can help you track where your money is going.

Your bank may have an app or account feature that breaks down your monthly spending into categories. Categorizing your spending is helpful. These categories can include fixed payments like housing or your car payment and variable spending like food or entertainment. You can even get more specific. For instance, if you enjoy going out to eat, instead of just a basic category of “food,” you can break it down into “grocery” and “restaurant.”

You likely have expenses outside of your everyday checking account, like a credit card with another bank or expenses paid out of a joint account with a partner. There are apps that can help you keep track of your money across accounts. Just make sure you’re accounting for money coming and going out of all your banks or sources.

After creating your categories, take a look at your last few months of spending. You can choose a longer time frame if you want a larger sample. Where is your money going? Does it make sense for your current lifestyle and your future goals? Are there areas you want to improve?

Cut back where you can

Finding potential leaks in our spending and creating reasonable goals are two important components of a solid budgeting technique and can be done simultaneously. If you’ve just analyzed your monthly spending, looking for opportunities to cut back is a natural next step.   

When you look at your categories, some of your monthly spend may be right where you need or want it. After all, you have to eat, so your grocery spending may be completely appropriate. The same may be for housing and transportation. But ask yourself this: Are there any spending categories you think you can and should scale back?

Often, people suggest cutting back on little things, like a daily coffee or restaurant spending. But cutting back doesn’t always have to be about sacrificing things you cherish. Maybe you like your daily coffee run or quite enjoy going out to restaurants with friends and family.

A good place to start when cutting back is by focusing on your biggest spending category that brings you the least amount of personal value. Just because you spend a lot on something doesn’t mean it needs to be addressed immediately. Housing is typically the biggest expense for people. But outside of refinancing your home, downsizing or moving out, your options for cutting back are limited.

Maybe your spending analysis found impulse spending you can scale back. Or maybe you’re signed up for a personal fitness or other membership(s) you’re not getting most use out of. The point is, it’s up to you to determine if what you’re spending on each category matches the importance or the value that category brings you.

For each category, determine if the amount you’re spending is appropriate. If you’re comfortable with it, leave it. If not, come up with a number you think is more appropriate each month. Do this for every category. The difference in your prior spending and the new amount you say you’re going to spend can be put towards your financial goals. It’s OK if you’re cutting back minimally or slowly — every little bit helps. Everyone is in a different place financially.

Set clear and specific goals

Goals are important as you find areas to adjust your spending. If you freed up some cash, you now have somewhere predetermined to put it. Goals could be things like saving for an emergency fund, retirement or a much-needed vacation. Another worthwhile goal would be to pay down debt, especially if it’s high interest debt. Having both long-term and short-term goals are smart. What’s important is to be specific in amount and timeframe when you can. Instead of just noting you want to “save more in an emergency fund,” switch to “I want to save $1,000 by X date”.

Finances are personal, so choose amounts and timeframes that are manageable. It’s good to challenge yourself, but you don’t want to set expectations too high. You want to be motivated, but not disappointed if you don’t make it.

After you’ve set your goals, prioritize them and attach a percentage that reflects their importance. All of your goals should add up to 100%. Here’s a sample:

• Pay off personal loan by April 20, 2023 – 40%
• Emergency fund: save $1,000 by Dec. 31, 2022 – 30%
• Investment fund: save $3000 by March 2024– 20%
• Vacation fund: save $1500 by June 2023 – 10%

Why bother with these percentages? Now you know where, specifically, you’re going to put any extra money from your monthly spending cuts or unexpected savings. For example, if your tax return was $1,000, using the sample above, that person would use $400 to pay down personal loan debt, add $300 to their emergency fund, deposit $200 into their investment account and further fund their next vacation with $100.

You can use this same approach for whatever amount you were able to cut from your monthly spending. If you looked at all your spending categories and found you could save an extra $100 a month, you could use the same percentage strategy above. Having specific goals help you take the guesswork out of what to do with your money.

Automating your savings can help you keep the momentum going. Take how much you plan to save each month and divide that by the number of times you get paid each month. So if you want to save $100 a month and get paid bi-weekly, you can set up the $50 to automatically be deposited into the appropriate accounts.

Track your progress

When you’re first starting out with a budget, it’s important to check in on your progress regularly. You can do this the old-fashioned way with a pen and paper, but budgeting apps can do it automatically for you as well. After each month, see how you did with your spending. Did you make the cuts you hoped to? Were there any unexpected expenses?

Not all months look the same — you may have subscriptions or bills that are paid on an irregular basis. Depending on where you live, energy bills can look quite different each season. You’ll learn these things as you go and can change your budget and goals as needed. It can take a few months to get used to a new money mindset and strategy, so be patient with yourself. Mistakes and setbacks can happen.

Going forward, you don’t need to think of a budget as something that’s rigid or static. A budget can and should change as your financial situation does. Whether you add new goals, experience a setback or increase your income, your budget should be a reflection of what you value and what you’re aspiring to achieve financially.

If you’re working on managing your credit as well, you can read our six tips for rebuilding your credit health.