How to Budget: Simple Tips to Manage Your Money

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 understanding where your money is going and if it matches your goals and values.

Why budgeting is important

Beyond knowing your numbers and being active with your money, budgeting is a positive financial habit. As you start hitting your financial goals, you’ll not only be rewarded with the financial reward or independence that milestone provides, but the motivation to continue setting bigger, more aspirational goals.

How to budget money

Budgets aren’t merely about sacrifice, but about aligning your financial habits with what you value. Everyone’s budget will be different. There are lots of budgeting styles and rules out there, but here are 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.

Start by looking at your income, savings, debt and monthly expenses. While you may know how much money you earn each month, you may be surprised by how much you're spending in certain areas. Taking a closer look at your finances can help you identify spending patterns and make more informed decisions about your money.

Calculate your monthly income

Before creating a budget, determine how much money you have available each month. Include your take-home pay and any other reliable sources of income, such as freelance work, rental income or side gigs. If your income varies, look at several months of earnings and calculate an average.

Know 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 are likely to 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, look at your last few months of spending. You can choose a longer time frame if you want a larger sample.  Your spending in some categories may vary from month to month and outside forces, like inflation, can impact budgets.  

Ask yourself these questions as you analyze your spending:

• Where is my money going?
• Does it make sense for my current lifestyle and my future goals?
• Are there areas I want to improve?
• Have my spending habits changed over time?

The goal isn't to judge your spending. It's to understand it. The more clearly you see where your money is going, the easier it can be to create a budget that supports your financial goals.

Separate fixed and variable expenses

Understanding which expenses stay the same each month and which fluctuate can make budgeting easier.

Fixed expense examples:

• Rent or mortgage
• Car payment
• Insurance
• Subscription services

Variable expense examples:

• Groceries
• Dining out
• Entertainment
• Utilities
• Clothing/shopping
• Travel

Variable expenses, which are those that can vary from month to month based on usage, are not as predictable as fixed expenses. Because of this, when you’re looking to cut back on spending, variable expenses may be the easiest to adjust.

Look for opportunities to reduce spending

Finding potential leaks in your 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.

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 enjoy going out to restaurants with friends and family.

But ask yourself this: Are there any spending categories you think you can and should scale back?

For example, you may discover recurring subscriptions you rarely use, duplicate streaming services, impulse online purchases or memberships that no longer fit your lifestyle. You might find you're paying delivery fees multiple times each week, spending more on dining out than you realized or regularly buying items you don't truly need. Small expenses can add up over time, but larger recurring expenses often provide the biggest opportunities for savings. As you review each spending category, ask yourself:

• Does this expense add value to my life?
• Would reducing this expense significantly affect my quality of life?
• Is this spending aligned with my current priorities?
• Is this helping or slowing my progress toward my financial goals?
• Could I find a lower-cost alternative without sacrificing something important to me?

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.

It’s important to categorize expenses not just on how much they cost, but also on how much it fulfills you. Hobbies can cost money. But if you feel like you’re spending a responsible amount on your hobbies and they help you connect with people and allow you to express yourself creatively, then leave them in your budget. Your savings goals and personal goals should work in tandem when you decide where you need to cut expenses. Maybe your spending analysis found impulse spending you can scale back. Or perhaps you’re signed up for a personal fitness or other membership(s) you’re not getting much use out of. 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 financial 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 is 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 to you. All of your goals should add up to 100%. Here’s a sample:

• Pay off personal loan of $2,500 by April – 40%
• Emergency fund: save $1,000 by May – 30%
• Investment fund: save $3,000 by July – 20%
• Vacation fund: save $1,500 by September – 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. If you do receive a tax return, read our blog for 5 tips to use tax return money productively. 

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.

Your financial goals may differ from the example above. Your savings plan isn’t just about moving around money so you can save or pay off debt, but perhaps so you can allocate more to the things you currently enjoy. Personal savings is personal, but having a dedicated plan will help you allocate money productively.

Track and adjust your budget

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?
• Was there an area where you could improve?

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.

What is the 50/30/20 rule?

The 50/30/20 budget is a way to divide your take-home income into three categories:

• 50% for needs
• 30% for wants
• 20% for savings

50% needs:

Your needs would include essential expenses you must pay to live and work. These could include:

• Rent or mortgage
• Transportation
• Groceries
• Utilities
• Insurance

Every person has different needs. For example, if you have children, childcare may be included in this category. Some people also include debt payments as they are a necessary obligation.

30% wants:

Wants include non-essential expenses that fit your lifestyle. Examples include:

• Memberships
• Entertainment
• Shopping
• Hobbies
• Vacations

Again, everyone is different and what lifestyle expenses you have will be unique.

20% savings:

For this portion of your budget, you would allocate money that helps build your savings. Here are some examples:

• Emergency savings
• Retirement savings
• Investing
• Savings for major purchases (home, auto, etc.)

You can include extra payments to your debt if you have any. Having an established percentage dedicated to savings can help you reach your financial goals.

The 50/30/20 rule can help you manage your spending. Because of its flexibility, this can be a good strategy to use if you’re new to budgeting. But keep in mind that these percentages can vary based on a variety of circumstances, including where you live, future savings goals, and more.

What is zero-based budgeting?

Zero-based budgeting is a strategy in which you assign every dollar of take-home income a specific job. Ideally, when completing this budget, your income minus your expenses equals zero. Here is an example:

Income = $4,000/month

Income ($4,000) – planned expenses and savings ($4,000) = $0

A zero-based budget can help you eliminate unnecessary spending and encourages intention with every dollar you spend. But this strategy requires consistent tracking and can make planning more difficult if you have inconsistent income.

How budgeting can support your credit health

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.

A budget can help you make on-time payments, reduce debt and avoid taking on more debt than you can comfortably manage. These habits may support your overall financial health and can help you stay on track with your credit goals.

If you’re trying to build a savings fund while managing debt, learn how to evaluate your options and create a strategy that works best for your situation with our blog: Should I Save or Pay Off Debt?