Learning how to budget your money is about your income, expenses, goals, and lifestyle. No way is there a one-size-fits-all budget! I mean, personal finance is… well, personal. And that’s what a lot of how-to-budget advice ignores.
That all changes today. I’m going to teach you how to budget your money by creating a plan that works for you. You’re going to learn how to build a realistic budget that you can stick to, with tips along the way to help you succeed.
I’m also holding you accountable.
Because the best way to budget your money is to be honest with yourself. I’ve seen a lot of people fail at budgeting and managing their money because they aren’t willing to admit how much they spend or how much debt they have.
You also have to be honest about your goals. Even if you have a lot of debt, it’s 100% okay to still have early retirement as a goal. It might feel a little crazy at first, but I’ve seen people make it happen. By acknowledging your debt, you’ve realized a limitation, and a good budget will help you create a plan to overcome those challenges.
The point is, your budget should be a reflection of your life.
How to Budget Your Money: Creating a Budget That Works for You
Step 1: Start tracking your income and expenses
This step involves two parts: figuring out your income and expenses. A good budget starts with a clear idea of how much money is coming in and going out each month.
For income, you want after-tax income, and you want to determine how much you make each month. This is a little easier for salaried workers because you’re paid the same amount every month. But if you have an irregular income (you’re a freelancer, own your own business, side hustle, etc.), you want to figure out what your lowest-paid month looks like.
The next part of this step is to track your expenses. You can do so by looking at bank statements, receipts, credit card statements, and more. You can enter things into a spreadsheet, keep a ledger going, or you can connect your accounts to a budgeting app.
You can categorize expenses as you track them, but you’re going to adjust all of your budget categories after you spend a month tracking them. Right now, your main priority is to figure out how much you spend and make in an average month.
Budgeting Pro Tip: Know the pros and cons of budgeting apps.
A budgeting app will save you time because after you connect all of your accounts, the app will start tracking your spending for you. The flip side is that this hands-off approach doesn’t force you to pay attention to each individual transaction, meaning it’s easy to overlook spending habits.
Step 2: Make a list of your debts
Debt payments can account for a large part of your spending, and you’ll be aware of that after tracking your expenses for a month.
But here’s the thing: you don’t have to live with debt forever. I made the decision to destroy my student loan debt as quickly as possible because I didn’t want to live with it in my budget for the next 10 years. Paying it off quickly meant I could budget that money for other things.
Being 100% debt-free isn’t a goal for everyone (and that’s okay!). But there are some debts you should want to get rid of as quickly as possible. Credit card debt, for example, can balloon out of control if you aren’t actively paying it off.
Knowing what your debts are, how much you owe, and how they affect your overall finances is an important part of learning how to budget your money.
Here’s how to make a list of your debts – you want to write down:
- What each of your debts are (mortgage, car loan, student loans, credit cards, personal loans, medical bills, etc.)
- Minimum monthly payment
- How much you owe
- The interest rate for each debt
Remember that this is to help you see your larger financial picture, but you’ll notice pretty quickly how paying off your debt will free up money for other things.
Budgeting Pro Tip: Destroy your debt.
If you want to get serious about paying off your debt, there are two really effective debt payoff methods: the debt snowball and avalanche. You need to know how much you owe and the interest rates of each debt, and then you will use your budget to see how much extra you can put towards your debt payoff. Learn the differences and how to use them at Snowball vs. Avalanche: Which Debt Payoff Strategy is Best?
Step 3: Determine your goals
Everyone has financial goals, whether short or long-term ones. Short-term goals can be things like going on a family vacation next summer or buying a new washer and dryer. You can also set long-term goals for retirement or becoming debt-free.
Your budget will help you reach your goals, but first, you need to decide what your goals are.
If you’re married or have a partner, I highly recommend talking about your goals together. You can have joint or separate goals, help support one another, and create a plan together. Setting financial goals with your partner means you get to celebrate with them too. This was a huge motivating factor when I was paying off my student loan debt… opening a nice bottle of wine and sharing it with my wife as I hit milestones.
When you set your goals, think about:
- What the goal is
- Your timeline – how quickly you want to pay off your debt, buy a new house, take that vacation, etc.
- How much money you need to save to realize your goal
You will figure out how much money you can allocate towards each goal when you put your budget together.
Budgeting Pro Tip: Keep it simple.
Setting goals can feel like a nebulous step when you first start budgeting, but don’t feel pressured to make goals now. You can start your budget without clearly defined goals and add them in later. Keeping your budget simple at first isn’t a bad idea.
Step 4: Organize and add up your expenses
After spending the past month tracking your expenses, you can categorize your expenses in a way that makes sense to you. For example, some people might put restaurant spending with groceries in a “food” category while others might file restaurant spending under “fun money” or “entertainment.”
If you want to learn how to budget your money, do what works for you.
Here are a few more ideas of how you can organize expenses in your budget:
- Every time you put gas in your car, label it as “fuel”
- Electricity, water, gas, sewer, and internet are listed as “utilities”
- Any clothing purchases you bought during the month go under “clothing”
- Your mortgage or rent under “housing”
- Prescriptions and health care premiums under “medical”
- Pet food, medicine, treats, and toys under “pets”
Don’t forget all of your debt payments – I personally like to organize debt into individual categories. For example, student loans as one category, credit card debt as another, car loan another, and so on.
Also, don’t forget about the savings. Your retirement savings, emergency savings, amount you’re investing each month, etc. All of that needs to go in your budget too, and you can separate it by type of savings. But again, do what makes sense to you!
After you have everything categorized the way you want it, add up each category. Then add each of those totals together. That’s how much money you’re spending each month. It might be a sobering amount, and the next step is going to help you address that.
Step 5: Finalize your budget
The goal is to spend less than you make. Now you’re going to balance everything together in your budget so you don’t overspend your income.
As you learn how to budget your money, know that there aren’t hard and fast rules about how you balance everything together. Some people love one budgeting strategy over another (more on these methods in a minute), but you have to find what works for you.
Creating a budget forces you to face some sobering realities. You may have realized that you’ve been spending a couple of hundreds of dollars each month going out to eat while putting hardly anything away for retirement. Do something with that information and start setting clear spending limits for yourself.
If you are spending more than you make, then you need to make a change ASAP. There are plenty of ways to reduce your expenses or start making more money. You’ll also want to go through and prioritize expenses based on wants versus needs. Ask yourself: Is this something I really need now? Are there better ways to use my money?
There are also lots of small adjustments you can make that will help you find more room in your budget, like:
- Switching to a cheaper cell phone plan
- Shop around for a less expensive car insurance
- Creating a weekly meal plan so you’re less tempted to order out
- Get rid of cable and switch to a more affordable alternative
- Start bringing your lunch to work
- Get rid of subscription services you aren’t using
- Buy generic
Budgeting Pro Tip: Find a budget strategy that works for you. If you need some budget guidelines to help you allocate your income, here are a few effective budgeting methods:
- 50/30/20 Rule: 50% of your income goes towards needs, 30% for wants, 20% for savings and debt. This is a good baseline to start with and then adjust as needed.
- Zero-based budgeting: This super-organized budget is surprisingly flexible because you give every dollar you make a job. People who want to pay off debt or set major savings goals like zero-based budgeting.
- Envelope system: Set spending limits for categories by using cash envelopes. You put the amount you can spend in certain categories in separate envelopes, and only spend what’s in that envelope. You can have an envelope for groceries, clothing, pet expenses, etc. Cash is a tangible reminder of your limits.
Step 6: Keep checking in
After you put your budget together, check-in throughout the month to make sure you’re sticking to your budget. Some people set spending alerts through their bank accounts or use budgeting apps to alert them when they’re close to going over budget.
If you do spend more on groceries one month, you’ll have to adjust your budget and pull money from another category. That’s okay! If that continues to happen, then make adjustments to your budget so you can stay on track.
It’s also important to make changes to your budget as your life changes. Sit down and readjust your budget if you buy a new house, pay off a big chunk of your debt, have a kid, etc.
The final word on learning how to budget your money
Like I said at the beginning of this article, budgeting is personal. There are some basic guidelines to follow, like avoid consumer debt (credit cards) and spend less than you make, but it’s honestly up to you after that.
Prioritize your needs, but make room for the things you want. As long as you have a budget, you can make room for both.
About Millennial Money Man
Bobby Hoyt is a former band director who paid off $40,000 of student loan debt in 18 months on his teaching salary and then left his job to run Millennial Money Man full-time. He helps other Millennials earn more through side hustles, save more through budgeting tools and apps, and pay off debt. He is a personal finance expert who has been seen on Forbes, Reuters, MarketWatch, CNBC, International Business Times, Business Insider, US News, Yahoo Finance, and many other personal finance and entrepreneurship media outlets.
