How to Budget: A Step-by-Step Guide to Managing Money

Budgeting is an important life skill to develop, because it provides you with a foundation for successful money management. Once you know how to budget, you’ll be empowered to make financial decisions that align with and support your life goals — whether that’s becoming a homeowner, launching your own business, or traveling the world. Knowing how to budget your finances also makes it easier to avoid overspending, prepare for emergencies, and pay off debt.

By setting clear guidelines for spending and saving, a personal budget makes it easier to achieve your long-term financial goals, such as buying a home or paying for a vacation next summer. Understanding how to make a budget is also important for managing monthly and everyday expenses, such as: 

Debts, like student loans or unpaid credit card balances

Groceries and household essentials 

Insurance payments

Medical and dental care

Rent or mortgage payments

Utility bills, like internet and electricity

Personal finance trends shift over time — especially in response to economic inflation. In 2022, inflation reached its highest point since 1981, peaking at a rate of 9.1%. While the current inflation rate is closer to 2.8%, consumers are still feeling the impact through rising prices on everyday essentials like groceries and housing. As a result, many people are rethinking how they budget – moving away from static, one-size-fits-all plans and toward more flexible, needs-based budgets that adjust month-to-month. 

At the same time, access to financial wellness tools is more widespread than ever. From personal finance blogs and podcasts to Youtube and TikTok tutorials, today’s consumers can tap into a wide range of resources that can help make budgeting feel more approachable – even during periods of economic uncertainty.  There’s also been a rise in buy now, pay later (BNPL) services, which have gained popularity over the past few years, giving consumers even more short-term flexibility when it comes to purchasing. 

Knowing about common budgeting mistakes can help you avoid or correct them. Here are some spending habits that can slow down your financial progress — and simple budget tips to help you fix them. 

Mistake #1 — Impulse buying 

The Fix — Try practicing the 30-day rule, which involves waiting for 30 days to see if you still want to make a purchase.

Mistake #2 — Not saving for emergencies

The Fix — Aim to deposit at least 20% of each paycheck into your savings account. 

Mistake #3 — Not tracking your spending

The Fix — Use a free app to help you accurately monitor your spending, like Plum, Emma, Goodbudget, or Spending Tracker.

Step 1: Calculate and review your income

Determining your income is Step 1 of how to create a budget. The fastest and easiest way to determine your income is by reviewing your tax documents, such as W-2s (for employees) or 1099s (for independent contractors). You can also view bank statements, pay stubs, or client invoices, or use a net income calculator. Remember to include income from temporary gigs, short-term projects, and side hustles, along with assets or investments if applicable.

Step 2: Monitor your expenses

One of the most important tips for budgeting is to track your expenses. Monitoring how much you spend is crucial, because it shows you exactly where your money is going — and where you can save. It’s helpful to break down your expenses into categories, like fixed (flat) expenses vs. variable (fluctuating) expenses, essentials vs. luxuries, or different types of monthly bills. It’s also helpful to experiment with different methods of tracking your spending, like using a mobile app, spreadsheet, or simple pen and paper.

Step 3: Establish financial goals

Setting financial goals is an important step of designing your budget. For example, you might set a goal to pay a certain debt, or save a certain amount, by a specific date. It’s helpful to break your goals down into long-term and short-term milestones, like setting specific targets for 1 month vs. 1 year. When you have clear targets in mind, it’s easier to stay motivated — and stay on the right financial track. Here are a few examples of common financial goals and reasons to budget: 

Buying a new car  

Creating an emergency fund 

Funding your child’s college education

Moving or buying a house 

Paying your tuition or student loan debt 

Saving for retirement 

Starting your own business 

Traveling or going on vacation

Step 4: Create a budget

Now that you’ve calculated your income and set financial goals, let’s break down the actual steps of how to make a monthly budget:

1. Start with your take-home income

2. Create line items for:

   Fixed expenses, like rent, internet bills, and insurance premiums

   Variable expenses, like groceries, medical care, and transportation

   Savings goals, like the amount you want to save for your next vacation

3. Double-check your math to confirm that your income matches your expenses and savings goals

Step 5. Choose a budgeting strategy

There are many different budgeting techniques, so it’s important to choose a strategy that fits with your lifestyle and goals. Some popular budgeting methods include: 

50/30/20 — Best for people who want a simple, flexible approach to budgeting

Budget 50% of your income for needs, 30% for wants, and 20% for savings.

Envelope — Best for visual learners and people who want to curb impulse spending

Add cash to envelopes labeled with different budget categories, like “groceries” or “gas.” 

Pay-Yourself-First (Reverse Budgeting)— Best for people who want to prioritize saving money 

Put money into your savings account before you pay expenses or make any purchases.

Zero-Based — Best for businesses and people with steady incomes

Determine how 100% of your income will be spent or saved until all funds are completely accounted for.

Step 6. Evaluate your budget regularly

Aim to maintain financial habits that support your goals, and review your finances regularly – at least once per month – to ensure you’re staying on track with your budget. This also gives you the opportunity to make appropriate adjustments if your savings goal or financial situation changes.

Zip is a buy now, pay later (BNPL) app that splits purchases into easy installments, giving you more flexibility and over your budget. You can use Zip to break big purchases into installments. Apply without impacting your credit score in minutes. Learn more about how Zip works to make financial management simple. 

How do I stick to a budget?

There are multiple ways to increase the likelihood of sticking to a set budget. Use free apps to help you track your spending. Keep reminders of your short-term and long-term financial goals in a place where you can easily refer back to them. Save money on your necessities by planning meals and transportation in advance. As for unplanned expenses, delay impulse buys for at least 1 week, and try to limit how frequently you use your credit card. Rewarding yourself for reaching milestones can also help motivate you to stay on course.

What is the simplest budgeting method?

While opinions vary, many experts recommend “50/30/20” as one of the simplest budgeting methods for beginners. The 50/30/20 method involves allocating 50% of your income for needs, 30% for wants, and 20% for savings. Other simple, beginner-friendly budgeting methods to explore include zero-based budgeting, envelope budgeting, and pay-yourself-first budgeting. 

What are the 5 basics to any budget?

There are 5 key factors to keep in mind when you’re deciding how to budget money: how much income you earn, how much debt you owe, how much money you have saved, how much your fixed expenses cost, and how much you estimate your unplanned or variable expenses to cost. You should calculate both the monthly and yearly amount of each category.

What’s the difference between fixed and variable expenses?

Variable expenses rise and fall, while fixed expenses always stay the same. Examples of variable expenses include groceries, electric bills, and gas prices, which vary from week to week and month to month. Examples of fixed expenses include rent, monthly health insurance premiums, and monthly subscriptions or membership fees. Some expenses, such as mortgages, can be fixed or variable depending on the situation.

How can I budget for unexpected expenses?

Most experts recommend saving 20% of your income, and creating a large enough financial cushion to support yourself for at least 3 to 6 months in case of an emergency. Here are some budgeting tips to help you reach these goals: find ways to increase your income, consider applying for personal loans, take advantage of buy now, pay later (BNPL) services, and reduce or eliminate luxury spending.

The above is for informational purposes only and is not intended to be financial advice. Seek a licensed professional for investment advice.