Your Guide to How to Budget Money
If I have take-home pay of, say, $2,000 a month, how can I pay for housing, food, insurance, health care, debt repayment and fun without running out of money? That’s a lot to cover with a limited amount, and this is a zero-sum game.
The answer is to make a budget.
What is a budget? A budget is a plan for every dollar you have. It’s not magic, but it represents more financial freedom and a life with much less stress. Here’s how to set up and then manage your budget.
How to budget money
Calculate your monthly income, pick a budgeting method and monitor your progress.
Allow up to 50% of your income for needs.
Leave 30% of your income for wants.
Commit 20% of your income to savings and debt repayment.
Understand the budgeting process
Figure out your after-tax income: If you get a regular paycheck, the amount you receive is probably it, but if you have automatic deductions for a 401(k), savings, and health and life insurance, add those back in to give yourself a true picture of your savings and expenditures. If you have other types of income — perhaps you make money from side gigs — subtract anything that reduces it, such as taxes and business expenses.
Choose a budgeting plan: Any budget must cover all of your needs, some of your wants and — this is key — savings for emergencies and the future. Budgeting plan examples include the envelope system and the zero-based budget.
Automate your savings: Automate as much as possible so the money you’ve allocated for a specific purpose gets there with minimal effort on your part. An accountability partner or online support group can help, so that you’re held accountable for choices that blow the budget.
Practice budget management: Your income, expenses and priorities will change over time, so actively manage your budget by revisiting it regularly, perhaps once a quarter. If you’re struggling to stick with your plan, try these budgeting tips.
Before you build a budget
NerdWallet breaks down your spending and shows you ways to save.
Frequently asked questions
How do you make a budget spreadsheet?
How do you keep a budget?
How do you figure out a budget?
Try a simple budgeting plan
We recommend the popular 50/30/20 budget to maximize your money. In it, you spend roughly 50% of your after-tax dollars on necessities, no more than 30% on wants, and at least 20% on savings and debt repayment.
We like the simplicity of this plan. Over the long term, someone who follows these guidelines will have manageable debt, room to indulge occasionally, and savings to pay irregular or unexpected expenses and retire comfortably.
Find out how this budgeting approach applies to your money.
Savings and debt repayment
Do you know your “want” categories?
Track your monthly spending trends to break down your needs and wants.
Allow up to 50% of your income for needs
Your needs — about 50% of your after-tax income — should include:
Minimum loan payments. Anything beyond the minimum goes into the savings and debt repayment category.
Child care or other expenses you need so you can work.
If your absolute essentials overshoot the 50% mark, you may need to dip into the “wants” portion of your budget for a while. It’s not the end of the world, but you’ll have to adjust your spending.
Leave 30% of your income for wants
Separating wants from needs can be difficult. In general, though, needs are essential for you to live and work. Typical wants include dinners out, gifts, travel and entertainment.
It’s not always easy to decide. Are restorative spa visits (including tips for a massage) a want or a need? How about organic groceries? Decisions vary from person to person.
If you’re eager to get out of debt as fast as you can, you may decide your wants can wait until you have some savings or your debts are under control. But your budget shouldn’t be so austere that you can never buy anything just for fun.
Every budget needs wiggle room — maybe you forgot about an expense or one was bigger than you anticipated — and some money to spend as you wish. If there’s no money for fun, you’ll be less likely to stick with your budget.
Commit 20% of your income to savings and debt repayment
Use 20% of your after-tax income to put something away for the unexpected, save for the future and pay off debt. Make sure you think of the bigger financial picture; that may mean two-stepping between savings and debt repayment to accomplish your most pressing goals.
Priority No. 1 is a starter emergency fund.
Priority No. 2 is getting the employer match on your 401(k).
Priority No. 3 is toxic debt.
Priority No. 4 is, again, saving for retirement.
Priority No. 5 is, again, your emergency fund.
Priority No. 6 is debt repayment.