Most people need a way to track where their money goes each month. Budgeting helps you manage your finances and makes it easier to save for your goals. The key is to find a tracking method that works for you. These steps can help you create a solid budget plan.

Step 1: Determine Your Net Income A good budget starts with knowing your net income, which is your take-home pay after taxes and deductions like retirement contributions and health insurance. This is the amount deposited into your bank account each pay period.

Focusing on your total salary instead of your net income can lead to overspending. If you are a freelancer, gig worker, or self-employed, track your contracts and payments carefully, as your income may vary.

Step 2: Track Your Spending Once you know how much money you bring in, the next step is understanding where it goes. Categorizing your expenses helps you identify spending patterns and find areas to save. Keep track of your daily expenses for several weeks using an app, a spreadsheet, or even pen and paper. Bank and credit card statements can also help by grouping transactions into categories like utilities and entertainment.

Next, separate your expenses into two categories:

• Fixed expenses: Regular monthly costs like rent, mortgage, utilities, and car payments.
• Variable expenses: Costs that change each month, such as groceries, gas, and dining out. These are areas where you might find opportunities to cut back.

Step 3: Set Realistic Goals Before analyzing your spending, list your financial goals.

• Short-term goals (1-3 years): Examples include starting an emergency fund or paying off credit card debt.
• Long-term goals (decades): Examples include saving for retirement or a child’s college education.

Decide how to balance debt repayment, saving, and investing. Be specific with your goals and include them in your budget plan. Setting clear goals can make it easier to stay motivated and stick to your budget.

Step 4: Create Your Budget Plan Now, compare what you are spending with what you want to spend. Start with your net income, then organize your fixed and variable expenses. Be sure to include line items for savings goals.

This process helps you see if you need to cut spending to cover necessities or increase savings. Consider setting spending limits for different expense categories.

Step 5: Choose a Budgeting Method There are different ways to structure your budget. Pick a method that works best for you.

• 50/30/20 Budget
  • Works for: Anyone, especially beginners.
  • How it works: Divide your take-home income into three categories:
    • 50% for needs (housing, food, transportation)
    • 30% for wants (entertainment, dining out)
    • 20% for savings or extra debt payments
  • Adjust the percentages based on your circumstances.
• Envelope Budget
  • Works for: People who struggle with overspending.
  • How it works: Assign each spending category an envelope filled with cash for the month. When the cash runs out, stop spending in that category. If using cash is difficult, set up separate checking accounts for each category.
• Zero-Based Budget
  • Works for: People with a steady income and who like detailed tracking.
  • How it works: Allocate every dollar of income to a specific expense or savings category so that your income minus expenses equals zero.
• Pay-Yourself-First Budget
  • Works for: People who prioritize saving and don’t want to track every expense.
  • How it works: Put a set amount into savings before paying for anything else. Then cover your necessary expenses. Whatever is left can go toward discretionary spending.

Step 6: Adjust Your Spending to Stay on Budget Once you document your income and expenses, make adjustments to avoid overspending and meet your savings goals.

• Start by cutting unnecessary expenses. Do you need both cable and multiple streaming services? Do you eat out often?
• If you’ve already cut discretionary spending, review monthly bills. Some “needs” might be more like “nice-to-haves.”
• If necessary, adjust your fixed costs. For example, shop around for better insurance rates.

Small changes can add up to significant savings over time.

Step 7: Review Your Budget Regularly A budget isn’t set in stone. Your income or expenses may change, or you may reach a goal and set a new one. Make it a habit to check in regularly and adjust as needed to stay on track.

By following these steps, you can create a budget that helps you manage your money effectively and reach your financial goals.