How to Make a Budget and Stick to It

Budget: Just saying the word can incite fear in some people. That’s because a budget can feel restrictive, time-consuming or even frustrating.

However, most people agree that it’s important to track monthly income and expenses. In fact, a survey by found that 90% of respondents said that everyone should budget. After all, there are plenty of good reasons to do so. The problem is actually making it happen.

Whether you’re new to budgeting or have tried to budget in the past without success, these tips will help you find a method to take control of your finances. Here’s how to make a budget and stick to it.

Why you need a budget

Think of a budget as a map for your money. For it to be effective, though, you need to know where you want your money to go. After all, a map isn’t that useful if you don’t know what your final destination is.

Determining what your financial goals are can help you create an effective budget and give you a reason to stick to it. A budget can help you …

  • Pay down debt
  • Build an emergency fund
  • Increasing your savings (for a down payment on a home, for college, for retirement)
  • Have the funds to do things you enjoy
  • Keep up with the rising cost of living

Once you’re clear on your financial goals and why you need a budget, it will be easier to choose a budgeting method that will work best to help you reach your goals.

Steps for making a budget

To get where you want to go financially, you have to know what your starting point is. This requires knowing how much is coming in versus how much is going out each month. Then, you'll need to find a method to ensure your money goes where it should.

Make a list of income and expenses

You can do the following with pencil and paper, in a spreadsheet or using an online budget worksheet. You'll need to log onto your bank and credit card accounts or gather your monthly statements. Using a service such as Carefull also can help you see all of your accounts in one place and where your money is going.

  • List all of your sources and amounts of monthly income, including paychecks or Social Security, pension payments, investment income.
  • List your monthly fixed expenses, including your mortgage or rent, insurance premiums, loan payments, phone service, prescription drugs.
  • List your monthly variable expenses, including food, gas and utilities.
  • List your periodic expenses, such as homeowners and auto insurance (if you pay annually), property taxes, home and auto repairs, medical care.
  • List your discretionary expenses, such as meals out, entertainment and nonessential services.

Look for costs that can be cut, if necessary

If your expenses are more than your income or don’t leave enough cash to reach your financial goals, you’ll need to find ways to cut costs. This might be easier than you think. Start by finding ways to trim fixed expenses by shopping around to find lower insurance premiums. Your loyalty to a particular insurer could be costing you.

You might be able to lower your utility costs by switching to another provider, if there is more than one in your area. Also, look for better deals on your Internet, cable TV and phone service—or consider dropping cable and switching to free and low-cost streaming services.

Choose a budgeting method to help you stay on track

The steps above won’t help you reach your financial goals unless you have a system to ensure that your money goes where you want it to go. Fortunately, there are a variety of budgeting methods. The key is to find the method that works best for you.

Cash envelope system: This method requires dividing cash into envelopes for your various fixed and discretionary expenses and for savings (such as an emergency fund). If you pay bills online, you can simply pull out enough cash each month for discretionary expenses.  This can help limit this type of spending because you’ll know once the cash is gone from your “dining out,” “entertainment” or “fun money” envelopes.  

Zero-sum budget: The goal of this budget is to put every dollar to use. Your income minus your monthly expenses must equal zero. So anything you have left over after covering necessary expenses should go toward savings, paying off debt or whatever financial goal you have. The key is to make a plan at the beginning of each month and to put the excess you have toward your goal right away so you don’t spend it on something else.

50/30/20 budget: With this method, 50% of your income should go to necessities (housing, food, etc.) each month, 30% can go toward wants, and 20% should go to savings and debt. If your current spending doesn’t align with these percentages, you’ll have to make some tweaks. And the 20% for savings and debt should come out of your income first to ensure this important aspect of your budget is covered.

Spending plan: This method helps you avoid feeling the sense of deprivation that budgeting can create . Instead of figuring out what expenses to cut, determine where you want your money to go with a spending plan. Start by making a list of your goals then reviewing your spending (from step one) to see if it’s in line with your priorities. For example, if your goal is to pay down debt but you’re spending more on meals out than debt payments each month, you’ll see that your spending isn’t aligning with your goal. To align spending with your priorities, ask yourself with each purchase whether it’s the best value for your money and if it’s taking you closer or farther away from your goals.

Bottom line

Do you have to track every penny when you make a budget? Not necessarily. If money is tight, it’s a good idea to keep close tabs to ensure you have enough cash in your bank account to cover all of your expenses. But if you aren’t living paycheck to paycheck or don’t have limited retirement income, you might not need a strict budget. At the least, though, everyone needs a plan to figure out where they want their money to go and some sort of system to keep tabs on where their money is actually going.

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