How to budget your money

4 minute read

When it comes to budgeting, too many people get caught up on how much they shouldn’t be spending. A good budget isn’t a set of rules or restrictions you have to follow; it’s more like a flexible spending plan that aims to balance your needs and your wants. 

If it's done right, you won’t feel deprived of the things that make you happy, now or in the future — whether it’s a daily $5 cup of coffee or a lavish retirement. The point of making a budget is to identify what you value in life and make sure your hard-earned money is going towards it.

So, how do you get started? Here are six simple steps.

1. Calculate your after-tax income

You need to know how much money you’re bringing home before you can figure out how much you can afford to spend (or save).

Check your last paystub for your after-tax pay. Multiply it by the number of times you get paid each month (for most people, it’s two) and you’ll get your total after-tax income.

If you contribute to a pre-tax workplace retirement plan, or you have money deducted from each paycheck to pay for benefits like health insurance, add those amounts back in before calculating your monthly take-home pay. Those are fixed expenses that you’ll want to account for.

If you’re self-employed and your income fluctuates, find the average of your three lowest-earning months over the last year. This conservative estimate gives you a buffer so that you don’t wind up living beyond your means.

2. Monitor your spending

Setting up a budget with arbitrary spending limits usually doesn’t work. Rather than randomly deciding you have $100 to spend on take-out dinners for the month, it’s best to build a budget around what is already working for you. For the next month, monitor your current spending closely and without judgment.

At the end of the month, categorize and total what you spent. Be as specific as you can — for example, if you buy coffee every morning, separate that total from food spending in general. This makes it easier to spot areas where you can cut back if needed.

3. Identify needs vs. wants

Differentiating between needs and wants is an important step. Generally, the costs you identify as “needs” will be fixed, or at least predictable, while the costs you identify as “wants” will be more flexible.

Necessary expenses are the bills you pay every month to keep the roof over your head, food on the table, and so on. Think: rent, utilities, groceries, health insurance and transportation costs (e.g. gas, car insurance, public transit). This should include any debt payments as well.

Keep in mind that you might pay some of these bills quarterly or annually. If that’s the case, make note of which month they’re due but divide the total by 12 so you get a monthly amount.

Any purchases that aren’t “needs” can be considered “wants.” That includes things like meals out, social events, travel and shopping.

Ideally, your essential costs will also include money that you set aside in savings and investment accounts. Experts call this “paying yourself first” because you’re prioritizing your future, as opposed to saving what money is left in your account at the end of the month, if there’s any.

The easiest way to pay yourself first is to set up recurring automatic deposits or transfers into a savings account for the days you get paid. Separating your money in this way is a form of mental accounting that can help curb the temptation to overspend.

4. Net your income and expenses

Subtract your monthly spending total from your monthly income total. You’ll end up with either a positive number (a surplus) or a negative number (a deficit).

5. Make adjustments

The number you calculated in the previous step should be $0 or higher. This means you’re not spending every dollar you earn (or borrowing to spend even more than you earn).

Depending on the size of your surplus, you might decide you can afford to upgrade to a more spacious apartment, trade in your old car, or enjoy more meals out with friends. If you have high-interest debt, you now have the opportunity to make larger payments to pay off your balance sooner. Or you may decide to pad your emergency fund.

If the difference between your spending and expenses is a negative number, take a step back and subtract only your “needs” from your income total.

The remaining amount is what you have available to spend on “wants” and it will need to be less than what you’re currently spending. Return to your spending categories and see where you can realistically cut back.

If you’re looking for an overall budgeting framework to follow, try the 50-30-20 rule where you split after-tax income into three categories: 50% for essential expenses, 30% for non-essential spending, and 20% for savings and investments. If you live in an inexpensive city, you may be lucky to not spend half of your income on essentials like housing, food, insurance and debt payments. In that case you could put more of your income towards leisure or social activities, or save it for larger goals.

6. Check in often

Your spending patterns and financial goals will change over time, but revisiting your budget doesn’t have to be a chore.

Think about it this way: Rather than setting rules for yourself, it’s about striking a balance between enjoying the present, paying off the past and planning for the future. It can be a puzzle, to be sure, but you have the ability to decide where all the pieces go.


This article was written by Tanza Loudenback from The Street and was legally licensed through the Industry Dive Content Marketplace. Please direct all licensing questions to

This material is provided for general and educational purposes only; it is not intended to provide legal, tax or investment advice. All investments are subject to risk. Please consult an independent legal or financial advisor for specific advice about your individual situation.