How to Budget Money in 5 Steps

A budget is a plan for every dollar you have. Whether your income is steady or varies from month to month, a budget helps you organize your expenses, savings goals and other financial obligations into a manageable system that can provide more financial freedom and a less stressful life.

How to budget money

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 receive is probably your after-tax income, also called net income or take-home pay. After-tax income is usually just that – the money you have left after federal and state taxes come out. For budgeting purposes, if you also have money taken out of your check for your 401(k), or health or life insurance, add those deductions back in to give yourself a true picture of your savings and expenses.

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 framework for how you budget. Everyone has different habits, personality types and approaches to managing money, and there are systems that can fit your lifestyle. Any budget must cover all of your needs, some of your wants and — this is key — savings for emergencies and the future. Budgeting system examples include the envelope system, the zero-based budget, and the 50/30/20 budget.

Step 3. Track your progress

Record your spending, or try tools such as budget apps or NerdWallet's budget template. 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

Automate as much as possible to make things easier on yourself. You can set automatic deposits to an emergency fund, investment or retirement account to match up with your paydays.

If your income is irregular, set reminders to manually transfer the money when you can. In either case, an accountability partner or online support group can help, so that you're held accountable for choices that don't fit the budget.

Step 5. Practice budget management

Your income, expenses and priorities will change over time, so manage your budget by revisiting it regularly, perhaps once a quarter. 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 priorities in your budget

When budgeting, it can be difficult to determine 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

One popular budget plan is the 50/30/20 budget. Over the long term, someone who is able to follow these guidelines will have manageable debt, room to indulge occasionally, savings to pay for irregular or unexpected expenses and the ability to retire comfortably.

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 absolute essentials overshoot the 50% mark, you may need to dip into the “wants” portion of your budget for a while. Or, a switch to the 60/30/10 budget might be a better fit. Switching your budgeting model isn't a sign of failure. Remember, a budget should be realistic for your location and life circumstances.

Even if your necessities fall under the 50% cap, revisiting these fixed expenses occasionally is smart. 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% of your income for wants

Separating wants from needs can be difficult. In general, 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 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 strict that you can't buy anything for fun.

Every budget needs wiggle room for unexpected or unanticipated costs, plus some money to spend as you wish. If there's no money for fun, you'll be less likely to stick to your budget.

Commit 20% of your income to savings and debt paydown

Use 20% of your after-tax income to put something away for the unexpected, save for the future and pay off debt balances (paying more than minimums). 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.

Best way to budget

The best way to budget is to find a strategy you’ll actually stick to, so aim for a plan that motivates you and fits your current financial situation. One option is the 50/30/20 budget mentioned above, but if that method isn’t realistic for you, maybe a 60/20/20 breakdown makes more sense. In the 60/20/20 budget, 60% of your take-home pay goes toward necessities, 20% toward wants and 20% toward savings and retirement.

You may need to try a few budget systems to find a solid match — just make sure that the plan covers needs, wants and savings. Consider also testing a few budget-tracking tools to find one you’ll reliably use, whether it’s a handwritten document, worksheet or an app.

By experimenting to find the best way to budget for you, you're most likely to land with a system that will help you reach your financial goals.