How to budget in 6 steps

A budget is one of the best ways to take charge of your money and achieve more of your financial dreams. Knowing how to budget can make you more aware of how you spend your money. It helps you identify where you may be spending too much money so you can figure out a plan to start saving. 

The idea of creating a budget might be intimidating, but it doesn’t have to be all that complicated. This guide will walk you through the essential steps of creating and maintaining a budget. 

1. Determine your net income

Accurately calculating your monthly income is the cornerstone of a successful budget. If you don’t know exactly how much money you have, it’s hard to plan how to save, spend, or pay off what you owe.

Your income is simply how much money you earn every month. It usually comes from your job but can also include profits from a business, interest from investments, or rental property payments.

To calculate your pre-tax monthly income as a salaried employee, divide your annual salary by 12. If you’re an hourly employee, multiply your hourly earnings by the hours you work every week (usually 40) and then by 52 to account for the weeks you work throughout the year. Then, divide this amount by 12 to estimate your gross monthly pay.

2. Calculate your expenses

Once you have a clear picture of how much money you’re working with each month, it’s time to figure out how you’re spending it. 

There are two main types of expenditures to account for as you build your budget: fixed and variable expenses. Fixed expenses tend to cost the same amount each month, while variable expenses change month over month.

Also, it’s important to differentiate between needs and wants. Needs are necessary expenses like rent, grocery, transportation, and health care costs. They’ll likely be a large chunk of your budget, which makes them all the more important to track. Wants, on the other hand, aren’t essential and include things like hobbies, vacations, restaurants, and entertainment.

Here’s a list of common expenses:

Fixed expenses (need)

• Rent
• Mortgage
• Car payments
• Student loans
• Insurance premiums

Fixed expenses (want)

• Streaming services
• Gym memberships
• Gaming subscriptions

Variable expenses (need)

• Groceries
• Gas
• Clothing
• Utilities (electricity, water, gas)
• Health care costs

Variable expenses (want)

• Dining out
• Entertainment (movies, concerts, etc.)
• Hobbies and leisure activities
• Travel and vacations

3. Track your spending

You know that feeling when you’re checking out at the grocery store, the cashier announces your total, you swipe your card, and by the time you’re loading your grocery bags into your car, you realize you didn’t even register the total amount you paid. It’s a concerning, out-of-body experience—but we’ve all been there. This is why tracking your spending is so important.

Here are a few tips to make expense tracking easier and more efficient:

• Ditch the cash: If you stick to card payments, you can refer to your online bank statements to monitor your spending easily.
• Check your budget every week: Collect receipts or statements on a weekly basis. Check to see if you’re on budget or need to reel in your spending for the rest of your budgeting cycle.
• Be organized and methodical: Start by tracking your fixed monthly expenses. Then, list the variable ones. Separate needs from wants, and make a habit of recording your expenses when you swipe your card.

4. Set goals and priorities

We all have different goals we want to achieve. Creating a budget helps you achieve them. As life goes on, your income, expenses, or lifestyle might change, so it’s important to keep your budget goals aligned with your current needs.

For example, if you have student loans and credit card balances, you’ll want to attribute part of your monthly budget to paying them off. Once you’ve settled your debts, your goal may shift to retiring by 60. A budget can help you figure out how much you need to save for retirement each month.

Start by determining your short- and long-term goals. Then, determine your priorities. 

Short-term goals, such as setting up an emergency fund or paying off a car loan, may require two or three years, while long-term goals such as saving for your children’s education or paying off your house mortgage may take decades. Prioritizing your goals helps you decide how much to set aside for each goal and establish milestones.

Set up a budget schedule and make it a point to review your budget regularly—each week, every month, or at least every quarter—for any major changes or to see if you’ve reached milestones. Not only will this help you recognize and celebrate your successes, but it will also encourage you to reevaluate and revise your strategy as needed.

5. Choose a budgeting plan

Depending on your spending habits, financial goals, lifestyle, and relationship with money in general, one budgeting tactic might make more sense for you than another. Let’s look at a few budgeting methods you can try.

The envelope method: Put your monthly income in a series of envelopes earmarked for variable expenses, such as groceries, restaurants, or hobbies. If you budget $100 for eating at restaurants, put that amount into the “restaurant” envelope. When the money’s gone, you have to wait until next month to eat out again. This helps you be more strict with your budget.

The zero-based budget: With this method, each month begins and ends with zero dollars, and every dollar has a purpose. For example, if you make $4,000 every month, you might put $2,000 toward living expenses, $800 toward debt, $900 toward personal expenses like traveling or dining out, and $300 toward savings. The idea is simply that all your money is earmarked for a specific purpose. Each month, you start back at $0.

The 50/30/20 rule: This commonly recommended rule is incredibly simple: You allocate 50%, 30%, and 20% of your income to the following categories: 

• Needs (50%)
• Wants (30%)
• Savings (20%)

6. Review and stick to your budget

Now you know how to budget on a monthly basis. So, how often should you review your budget? It’s ultimately up to you, but a good goal is to review your budget at least once every few months.

Every person’s budget will look different and can serve you well as long as your circumstances don’t change. Still, life is all about change. Major milestones, such as buying a house, starting a family, or seeing your children leave home, often call for adjustments to your budget.

Budgeting isn’t just something you do one month and then never again. Financial literacy is the key to achieving financial independence. If you’re interested in learning more, Intuit offers a self-paced financial literacy course to help you manage personal and entrepreneurial finances.