How to Make a Budget That Maximizes Your Money

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Hoping to gain better control of your finances? Then it’s time to learn how to make a budget. If you’re thinking “ugh” right about now, you’re not alone. For most folks, the idea of planning and implementing a personal budget is the exact opposite of fun. In fact, according to a recent study conducted by U.S. Bank, only 41% of Americans claim to use a budget.

But here’s the upside: planning a budget is easier than you may think, and a little effort now can make all the difference down the road—especially when you’re nearing retirement. We’ll walk you through the basics of budgeting step by step, so you’ll have all the information you need to start maximizing your money and planning for a more secure financial future. 

How to Budget Your Money in Five Steps

Add up all your sources of income

Start with your monthly income. If you work full-time and receive a regular paycheck, that may be your only regular source of incoming cash. Make sure to use your net income rather than your gross income, i.e., the money you take home after all deductions for items like taxes, health insurance, and 401(k) contributions. 

Next, add in any additional sources of income you receive each month. This could include returns from government benefits, alimony, child support, interest and dividends earned from investments, and anything you may earn from side hustles, such as selling items on Ebay.

Add up all your expenses

After you’ve identified and added up all your sources of income, begin writing down all your expenses. To make sure you’re not forgetting anything, it’s a good idea to review your credit and debit card statements and all receipts you’ve saved over the past month. 

If you’re unsure where to start, many budgeting experts recommend separating your costs into fixed, variable, and discretionary. Fixed expenses are those that remain roughly the same each month, and generally represent the biggest chunk of your budget. They can include:

  • Rent or mortgage payments
  • Real estate taxes
  • Car payments
  • Insurance premiums
  • Service payments (e.g. phone, utilities, internet)
  • Installment loan payments
  • Tuitions

When you’ve determined your fixed expenses, move on to your variable and discretionary expenses. Though both are non-fixed and are often categorized together, there’s a key difference: 

“A discretionary expense differs from a variable expense in that variable expenses are expenses required for comfortable living, such as groceries, car maintenance, and electric bills,” says personal finance software expert Shelly Elmblad, writing for The Balance. “You can live without discretionary expenses, such as movie tickets, books or your daily latte. Understanding the differences between different types of expenses is the key to good budgeting.”

Review your results

If your monthly income is greater than your monthly spending, congratulations! You’re already one step ahead of the game. Now that you know the average amount of your monthly surplus, you can start consciously budgeting for your financial goals, whether that’s buying a home, investing more in your retirement fund, or going on a dream vacation. 

However, if your results show that you’re spending more than you’re taking in, you’ll need to make some changes to your financial habits. 

Find ways to save

Start looking for ways to cut back that will help you save money without feeling like you’re depriving yourself and your family. Remember: The goal is not to make yourself miserable, but to find cheaper alternatives so you can get your finances out of the red. Here are just a few of the creative ways many budgeters cut back on expenses without making major lifestyle changes:

  • Eating out less
  • Replacing cable with a handful of streaming apps
  • Buying grocery store brands instead of name brands
  • DIY-ing home repairs 
  • Trimming energy costs by going green
  • Working out at home
  • Checking out free or cheap events like outdoor concerts or festivals
  • Canceling any unnecessary/unused memberships 

Choose a budgeting method

Once you have a clear picture of your finances, your next step is to choose a budgeting method—even if you’ve discovered that you’re not overspending. Whatever your financial situation, a budget is still the best way to hold yourself accountable for your spending choices, stay on track with your savings goals, bulk up your emergency fund, and maximize your hard-earned money. 

A variety of different budgeting methods and tools are available to both first-time and seasoned budgeters. Your job is to choose the one that will work best for your needs. Here are three of the most popular:

  • The 50/30/20 budget. With the “50/30/20” budget, you separate your after-tax income into three categories: 50 percent is earmarked for your needs (e.g., rent, groceries), 30 percent for your wants (e.g., dining out, movie tickets), and 20 percent for savings (e.g. investing, debt-reduction payments, emergency fund). This is a great option for budgeting novices since it spells out exactly what to do with your money to stay on track with your budget. 
  • The envelope system. If you have a tendency to overspend but don’t want to track every single purchase you make, the envelope system may be a good choice. 

With this budgeting method, you take your monthly discretionary income and divide it up among all the expenses that fall into this category. You then take physical envelopes and add your cash limit for each category—yes, actual cash—to the envelopes. Once you’ve used up the cash for a particular category, that’s all you’re allowed to spend on it for that month. 

  • The “pay yourself first” budget. Perhaps the most hands-off budget of the three, the pay yourself first budget requires you to allocate a certain amount of money each month for your savings goals. You then use the remaining money for bills and other expenses. 

This budget is a great choice for those who can easily afford to save but have never put much thought or effort into it. The idea behind this budget is to actively ensure that you’re saving for your financial goals without letting overspending eat away at your excess funds.

Set yourself up for success

Deciding to implement a household budget is similar to deciding to pursue a healthier lifestyle: getting started is relatively easy, but staying the course can be a good deal more challenging. 

Thankfully, there’s no rule that says you have to go it alone. Many budgeters find it helpful to seek out resources that will help them stay on track. Whether it’s advice from bloggers who specialize in budgeting, apps or budgeting software that automates the process and keep you apprised of your progress, or podcasts featuring tips to keep you motivated, there’s plenty of support out there if you need it. A budget can feel like a lot of work, but the benefits are well worth the effort in the long run. Future you will be eternally grateful.