How to Budget Money: A 7-Step Guide

Creating a budget is the foundation of your financial wellness. This comprehensive guide will walk you through seven practical steps to build and maintain a budget that works for you. 

1. Calculate Your Total Income

Start by gathering your total monthly income after taxes. Include:

• Earned income from regular salary or wages 

• Passive income

• Portfolio income from investments including dividends, interest, royalties and capital gains

• Royalties from copyrights, patents

• Rental income from rental real estate or Airbnb properties

• Any other sources of regular income tips, commission, child support, alimony, or any freelance income from side hustles

Be sure to use your net income after taxes, deductions in order to get an accurate income for budgeting that can be used for saving, investing and paying monthly recurring expenses.

2. Track Your Monthly Expenses

List all your monthly expenses and divide them into two categories:

Fixed Expenses:

• Rent or mortgage payments

• Utilities (electric, water, gas)

• Insurance premiums

• Car payments

• Mobile phone and internet bills 

• Loan payments 

Variable Expenses:

• Groceries

• Transportation costs 

• Entertainment

• Shopping & clothing

• Dining out

• Personal care

Track these expenses for at least one month to get an accurate picture of your spending habits and total monthly expenses.

3. Set Financial Goals 

Establish clear, achievable financial goals:

Short-term Goals (0-1 year):

• Building an emergency fund (1-3-6 months expenses)

• Paying credit card debt

• Saving for vacation

Long-term Goals (1+ years):

• Saving for retirement

• Paying off student loans

• Saving for a home down payment 

• Saving for major purchases

4. Follow The 50/30/20 Rule

Divide your net income into three main categories:

• 50% for needs (essential expenses)

• 30% for wants (non-essential expenses)

• 20% for savings and debt repayment

Adjust these percentages based on your personal financial goals and situation.

5. Choose a Budget Method

Select a budgeting system that world for you:

Digital Options:

• Budgeting apps

• Spreadsheets

• Online banking tools

Traditional Methods:

• Envelope system

• Paper and pencil tracking

• Receipt collection

6. Implement Your Budget 

Put your plan into action:

• Set up automatic bill payments

• Create separate savings accounts for different goals

• Use cash for discretionary spending if it helps control expenses

• Review your credit card statements regularly

• Track every expense for the first few months to adopt the new habit

7. Review And Adjust Regularly

   
   

Monitor your budget effectiveness:

• Review your spending weekly

• Make monthly adjustments as needed

• Celebrate successful milestones

• Reassess your goals quarterly and yearly

• Update your budget when income or expenses change

Tips for Success

• Start with small manageable changes and adjust over time

• Build an emergency fund first

• Look for areas to cut unnecessary expenses

• Don’t forget annual or quarterly expenses

• Include some fun money to avoid feeling deprived

• Use cash-back apps and reward programs

• Consider using the “pay yourself first” method

• Keep your budget flexible and realistic

Remember, budgeting is a skill that improves and develops over time with practice. Don’t get discouraged if you make mistakes. Real life can throw unexpected expenses that can derail your budget but as you grow your emergency fund, savings and investments over time they will not affect as much in the future. Adjust your approach and keep moving forward toward your financial goals.

Additional Resources

• Budget Template Download