How to Budget Money in 5 Steps

A budget is a plan for how you use your money. No matter how much you earn or how often you get paid, a budget helps you stay on top of your bills, savings and other money goals. It can give you more control and less stress.

How to create a budget: step-by-step

To budget money, follow the five steps below.

Step 1. Figure out your after-tax income

If you get a regular paycheck, the amount you bring home is your after-tax income. This is also called your net income or take-home pay.

If money is taken out of your paycheck for things like a 401(k) or insurance, add that back in when making your budget. That way, you'll see your full income.

If you have other types of money coming in — such as from side gigs — subtract anything that reduces that income, such as taxes and business expenses.

Step 2. Choose a budgeting system

A budgeting system is a plan for how to use your money. Everyone has different habits, personality types and approaches to managing money, and there are systems that can fit your lifestyle.

Every budget should cover your needs, some wants and savings for emergencies and the future.

Examples of budgeting systems include the envelope system, the zero-based budget, and the 50/30/20 budget, in which 50% of your take-home pay goes toward necessities, 30% toward wants and 20% toward savings and retirement.

Other breakdowns, like 60/20/20 and 60/30/10, may work well for some situations.

Step 3. Track your progress

Write down what you spend, or use a budget app or NerdWallet's budget template to help.

Pay attention to where your money is going. If you notice areas where you’re overspending, try to cut those costs. If you’re able to make cuts and have money left over, put it toward debt repayment, savings or another financial priority.

Step 4. Automate your savings

Set up automatic savings to make things easier. You can set automatic deposits to an emergency fund, investment or retirement account on your paydays.

If your income changes from month to month, set reminders to move money when you can. You don't have to do it alone — a friend or online group can keep you motivated to stick to your budget.

Step 5. Practice budget management

Your money situation will change over time. Check your budget every few months and adjust if needed.

If you find that the initial budgeting system you chose isn’t working for you, consider trying a different strategy. The budget you choose doesn’t have to last forever.

Determine your budgeting priorities

When budgeting, it can be hard to figure out which items are most urgent. Should you prioritize your credit card debt, student loan repayments or retirement savings? Here is a list of potential priorities from most to least urgent.

Try a simple budgeting plan: 50/30/20

One popular budget plan is the 50/30/20 budget. If you stick to this plan, you can handle your bills, save for the future, prepare for emergencies and enjoy life, too.

Allow up to 50% of your income for needs

Your necessities — about 50% of your after-tax income — should include:

• Groceries.

• Housing.

• Basic utilities.

• Transportation.

• Insurance.

• Minimum loan and credit card 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 basic needs go over 50%, you can use some of your “wants” money for now. That's OK. But if those needs are going over 50% month after month, consider switching to another budgeting model. Switching your budget isn't a sign of failure. Budgets should work for your life.

If your necessities fall under the 50% cap, review the expenses that stay the same every month, often called fixed expenses. You may find a better cell phone plan, an opportunity to refinance your mortgage or a less expensive car insurance option. Those money moves create breathing room in your budget.

Leave 30% for wants

Separating wants from needs can be difficult. 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 organic groceries a want or a need? How about house cleaning services or food delivery? Decisions vary from person to person.

If you want 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 should include fun money. If it's too strict, it's harder to stick with.

Commit 20% to savings and debt paydown

Use 20% of your after-tax income to put money away for the unexpected, save for the future and pay off debt balances (paying more than minimums). Think about your biggest money goals and use this part of your income to reach them.

Best way to budget

The best way to budget is one you can follow. Pick a plan that works for your life and goals. If the 50/30/20 budget isn’t realistic for you, maybe a 60/20/20 breakdown makes more sense — 60% toward necessities, 20% toward wants and 20% toward savings and retirement.

You might have to try a few different budget plans to find one that works for you. Just make sure any plan covers needs, wants and savings.

Try out a few tools to track your money — like a notebook, a worksheet or an app — and pick the one you'll actually use.

By testing what works best for you, you're more likely to find a budget that helps you reach your financial goals.