Budget Better: How to Make a Budget That Actually Works for You


The first step toward achieving financial empowerment is accurately tracking your income and expenses. The second is adopting a plan for managing these details. Put them together and you’ve got a successful budget.

Whether you’re new to budgeting (like two-thirds of Americans who say they don’t have a household budget), or you struggle to stick to yours, this step-by-step guide can help you create a plan that you’ll actually follow.

Step #1: Track expenses and income to understand where your money is going.

Do you know how much take-home pay you earn each month? Most people don’t. Even fewer know where it’s going.

It may sound simple, but there's often a gap between what we think we spend and what we actually spend—and seeing it in black and white can be pretty sobering.

A great starting point is to track your spending. (Apps like You Need a Budget, Mint and Wally can do a lot of the heavy lifting for you.) Looking back on your debit and credit card statements is another easy option. Either way, spending patterns should emerge relatively quickly. From there, group your spending into the following three categories:

  • Fixed expenses: recurring costs you pay at regular intervals, like your rent or mortgage, utility bills, car payments and other debt
  • Financial goals: money funneled to your emergency savings account, retirement contributions, vacation fund, home down payment fund, etc.
  • Variable expenses: flexible costs that cover everything else, like food, entertainment and personal care items

Now run the numbers: At the end of each payment cycle, do you have money left over? Are you breaking even, or even running in the red? No matter where you land on that spectrum, it's almost always possible to free up extra cash by bringing down your expenses.

Related: 101 Ways to Save More Now

Step #2: Reduce your expenses.

Now that you've got a clear-eyed view of where your money's going, you can free up some extra cash by dialing down your expenses.

Call your cable company or Internet provider to see if you can negotiate a cheaper monthly bill. The same goes for gym memberships, subscription services and even your rent.

Don’t forget your credit cards, too. A whopping 69 percent of Americans who've asked for a lower credit card interest rate have been successful, according to a 2017 survey—yet only 25 percent of cardholders have asked.

While you’re at it, consider cutting back on frequent costs that snowball. Grabbing a $10 takeout lunch just three times a week adds up to $120 a month. Pack a lunch just once more per week and you can potentially save $40 a month.

Step #3: Set personal financial goals.

Whether you’re talking about beefing up your savings accounts, losing weight or lowering your golf handicap, you’re much more likely to be successful if you set specific and realistic goals. Unfortunately, 34 percent of Americans have no plans for their financial futures, according to a 2015 Northwestern Mutual study.

What are your goals? Maybe it’s paying for an upcoming wedding or vacation or buying a new home. We all reach our unique goals by adopting the same behaviors: saving, paying off debt and growing long-term wealth via smart investing. But having a specific goal—and, better, a specific target amount—helps to keep us focused and motivated.

Priority number one should be building up an emergency fund. If money is tight, aiming to squirrel away $1,000 is a solid jumping-off point. Once your cash flow increases and your debt is under control, you can get more aggressive about topping off your emergency fund with three to six months' worth of basic expenses.

It’s okay to be working toward multiple financial goals at once. In fact, it’s recommended. If you wait until you’re debt-free and have a six-month emergency fund in order to start investing for retirement, you'll miss out on major growth, thanks to the power of compounding returns. So start small, and don’t feel bad about only contributing a little toward each goal at a time.

You may not be able to max out your retirement account right now, but try to contribute enough to at least recoup an employer match, if one is available to you. (After all, that’s free money!)

Step #4: Find the budgeting style for you.

Have you ever taken the time to pick out an outfit that fits your personality and taste? Think of the times when you’ve chosen wall posters or decorations that speak to your lifestyle and preferences. Now imagine going through that process again, but for...budgets.

It’s not as boring as it sounds. Selecting a budgeting method that works for your lifestyle is a good way to suit your particular financial needs, to fit the way your live your life and to prevent you from giving it up after a month.

Another reason why it helps to pick something uniquely suited to your tastes is to avoid being too aggressive and burning out. While you'll certainly make faster headway on your goals if you eliminate every dollar of "unnecessary" spending, it's only a matter of time before most of us grow tired of living this way and blow our budget altogether. You deserve reasonable creature comforts (it’s okay to get the extra guacamole), which ultimately makes personal budgeting an empowering, realistic way to manage money.

Here are a few different tried-and-true approaches.

The 50/20/30 rule: Easy to remember and difficult to mess up. This system has you allocate your take-home pay like this:

  • 50 percent for fixed expenses
  • 20 percent for financial goals
  • 30 percent for variable expenses

The 50/20/30 rule makes it easy to identify where you may be overspending so that you can course-correct as needed. Spending 40 percent of your income on variable expenses like food, for instance, is a sign that you need to dial back on eating out until you’re comfortably within 30 percent. Similarly, if you're overspending on fixed expenses, it may mean "borrowing" from your flexible spending to make up the difference.

The values-based budget: People like to do the things that make them happy. Though that may sound obvious, this interesting system operates under the assumption that unless your budget is customized to your individual priorities (i.e., making you happy), you simply won't stick to it.  

After accounting for your most important bills (rent or mortgage, utilities, food, minimum debt payments), along with your financial goals, really think about what brings you joy. This can range from charitable giving to weekly trips to the movies to daily lattes—whatever makes you happy. Prioritize your variable expenses so you can comfortably pay for those costs, and then stop spending on what doesn’t matter.

The flexible budget: This budgeting style is easy-going, with little work required—as long as you’re good about staying consistent with your spending.

First, automate all your monthly fixed expenses and financial goals. Then, whatever’s left in your bank account until next payday is yours to spend, without much additional oversight. This budgeting style is designed for people who rarely overspend, as it’s the most hands-off approach. 

The zero-sum budget: At first, this budget may seem more confusing than the rest, but it’s actually one of the most practical once you try it out. The main idea here is to account for every single dollar of income before it’s even spent.

For example, if you take home $2,000 every paycheck, you'll basically "spend" all $2,000 on paper as soon as you get paid. First, you'll pay off your fixed expenses and financial goals. Then, you assign all the remaining income to variable expenses until you reach $0. That way, you always know where your money has to go for the month, which should help you decide if you can or cannot afford a splurge purchase.

The trick here is to actually follow your budget once you have it written down. But if you do, it takes a lot of the uncertainty and chaos out of your day-to-day financial decisions.

The envelope system: It doesn’t get more old-school than this. To follow this budget, you visit the bank or ATM after each payday and withdraw cash for things like groceries, eating out, shopping and personal care items. You only withdraw what you need, and you only allow yourself to pay for those things with the cash you’ve withdrawn. Yep, it’s that simple.

It obviously won't work for every expense—it isn’t so easy paying your rent or phone bill with cash—but it's ideal for preventing overspending because once that money is spent, it's gone. According to a now-famous study out of M.I.T., consumers may be willing to pay up to two times more when paying with a credit card versus cash.

Step #5: Check in on what’s working (and what’s not).

Just like it’s healthy to have regular check-ins with yourself as a means of self-care, so too is it healthy to regularly check-in on your budgeting style to make sure it’s working.

Set aside a few minutes every week to take your financial temperature: Did you overspend in any categories? Did any pop-up expenses derail your budget? Have you come into a tax refund or other cash windfall you can direct toward your financial goals?

If something isn't working, explore where your costs can be trimmed. (FYI, it's better to shave your variable or fixed expenses than your financial goals whenever you can.) You can also try another budgeting method to see if it works better for your lifestyle.

The bottom line is that your budget isn't a fixed document that's set in stone, but rather a living, breathing reflection of your financial life. It can, and should, evolve with you.