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Budgeting guide: What it is and 6 steps to get started

Easily keep track of your personal and professional finances with this software guide.

Budgeting is the act of tracking what income is coming in and what money is going out each month. Tracking your savings and spending expenses, helps you get an understanding of the way you spend, the way you save and then identify ways to improve your finances and meet your savings goals.

How to budget

You can strip the budgeting process down to about 6 steps in total. Follow these steps one after another and you’ll have a stronger grip on your budget before you know it.

1. Find your budgeting method

First things first, think about how you want to budget. Do you want to track everything manually in a spreadsheet? Use a budgeting app to help you automate the process? There’s no wrong answer, but choose a method you think you’ll stick with — and dare I say — even enjoy.

If you’re a numbers person who loves a good spreadsheet, an automated software like Tiller Money may fit the bill. If you despise the thought of budgeting and want to automate the process as much as possible, a software like EveryDollar may be a better fit.

2. Tally up your income

Once you have your budgeting method, add your total monthly net income. This could include your salary, interest and dividends, investment income, family allowances, child support, alimony and even income from your side gigs or hobbies.

3. Calculate your expenses

Create budgeting categories for all of your monthly expenses. Look at your receipts and past credit card and bank statements to find the average amount you spend each month on each spend category. Some common expenses include:

Mandatory fixed expenses

  • Rent or mortgage payment
  • Phone bill
  • Car insurance
  • Internet
  • Phone bill
  • Utilities

Mandatory irregular expenses

  • Groceries
  • Haircuts
  • Gas for car
  • Transportation/parking

Occasional expenses

  • Car repairs
  • Medical expenses
  • Holidays and gifts
  • Renter’s or homeowner’s insurance
  • Property taxes
  • Bank fees

Optional spending

  • Dining out
  • Subscriptions
  • Entertainment
  • Fun money
  • Forgot to budget for — this category catches all the little things you forgot to set aside money for

Debt

  • Credit card
  • Student loans
  • Medical bills
  • Auto loan
  • Mortgage

Savings

  • Emergency fund
  • Vacation fund
  • Down payment on a house
  • New car fund
  • Retirement

You may realize you have way more expenses than you thought when you start calculating them, but that’s okay. Simply adjust these categories as you get more in-tune with your spending.

4. See where you stand

When you finish your budget you should have a figure that shows money left over at the end of the month. This is your income minus expenses.

  • If your budget shows a positive figure, then you’re spending less than you earn. Congratulations! Take that extra money and put it toward your savings goals and debt.
  • If your budget shows a negative figure, living beyond your means and possibly accruing more debt. Evaluate your expenses to see what you can do without. Maybe you can shave $50 off your dining out budget or cut out the one subscription service you use least. It doesn’t have to be anything drastic, but small changes will add up over time.

5. Track your progress

Set aside 15 minutes each week to import expenses into your budget, so you can see how much money you have left in each category. If you’ve overspent in one category such as car repairs, move money from another category such as dining out or fun money, to cover the difference. That way you don’t end the month in the red.

If you use cash a lot, keep receipts so you know what you’ve spent your money on. Otherwise, log in to your bank and credit card accounts to see how much you’ve spent.

6. Be flexible

No two months are going to be the same, so your budget needs to be adjusted regularly to match your changing finances. The interest rate on your mortgage may go up, straining your budget more than the previous month.

Or, you may pay off debts and find you have more money to put toward your savings goals. Whatever it is, stay flexible and be willing to adjust your budget as often as necessary.

Example: Budgeting spreadsheet

Here’s what my budgeting categories looked like before I paid off $18k in student loans. I put all of the leftover money toward my debt, then I used it to build a three-month emergency fund once it was paid off.

Cassidy’s monthly income and expenses

IncomeExpenses
Salary$4,000
Rent-$750
Groceries-$450
Dining out-$355
Car loan-$305
Utilities-$150
Miscellaneous expenses-$150
Cat expenses-$100
Car insurance-$95
Cell phone bill-$75
Car fuel-$55
Subscriptions-$15
Total income and expenses$4,000-$2,500
Leftover money $1,500

6 budgeting tips and tricks

Keep these tips in mind when creating your budget:

  1. Think long-term. You’ll most likely budget for the month, but remember that improving your finances is a long term commitment. You may not see results at first but keep at it. The reward will be worth it.
  2. Set realistic expectations. The first month your budget is in place is a good barometer of how realistic it is. If you can’t stick to it in the first month then you may need to revise it.
  3. Keep it simple. Less is more when it comes to budgeting categories. Instead of having a category for every little expense, create your main categories, then one “Forgot to budget for” category to catch the miscellaneous.
  4. Make reviewing your budget part of your routine. Get in the habit of reviewing and adjusting your budget at least once a week. Maybe you can do it with your morning coffee on Sundays as you begin to mentally prepare for the next work week.
  5. Use a budgeting app. A budgeting app allows you to quickly and accurately perform financial tasks such as bookkeeping, forecasting and financial analysis. Instead of having to do it manually on pen and paper, most budgeting apps connect to your financial accounts for you and crunches all the numbers in record time. It’ll also automatically update as you use your accounts.
  6. Use a proven budgeting method. There are several popular budgeting methods available to try out. If one doesn’t quite fit your needs, try using another. There’s no one right way to budget and it ultimately comes down to your goals and needs.

Types of budgeting methods

This table showcases the different types of budgeting methods and how they compare. Use it to decide which process may work for you.

TypeBest forHow it worksPopular accounts
Zero-based budgetingThose who want to know how they’re spending every single dollar they make
  • Take all income and allocate it toward expenses, debt and savings
  • Make sure income minus expenses equals zero each month
  • Can be automated or manual (manual would be tedious)
Envelope budgetingThose who need help curbing spending but don’t want to track every purchase
  • Set a spending limit for each category
  • Fill envelopes with money
  • Once envelope runs out, you can’t spend any more money in that particular category
  • Can be automated or manual
50/30/20 budgetingThose who are new to budgeting or want to budget quickly
  • Allocate 50% of take-home pay to necessities, 30% to wants and 20% to savings and debt
  • Don’t track individual expenses, just make sure you stay within certain range
  • Must be done manually
  • N/A
Kakeibo budgetingThose who want to take a more mindful approach to budgeting using a Japanese technique
  • Set aside money for savings first
  • Split remaining funds between Survival expenses, Optional expenses, Cultural expenses and Extra expenses
  • Tally up expenses at the end of the month to see how you did
  • Can be automated or manual
  • Kakebo app
  • Goodbudget
Reverse budgetingSimilar to Kakeibo budgeting, though with more flexible spending.
  • Set aside money for savings first
  • Split remaining funds however you deem necessary
  • Tally up expenses at the end of the month to see how you did
  • Can be automated or manual
  • N/A
Line item budgetingThis is a traditional budgeting method where you list your expenses in a spreadsheet, estimate how much you’ll spend in each category, then review your progress at the end of the month.
  • List expenses in a spreadsheet
  • Estimate your spending needs
  • Tally up expenses at the end of the month to see how you did
  • Can be automated or manual
  • Excel
  • Google Sheets

Which budgeting method should I use for short-term goals?

Kakeibo or reverse budgeting are both good options for reaching your short-term goals. Both focus on putting money toward your savings first before addressing other expenses. This method will naturally help you reach a short-term goal faster than a budgeting method like envelope budgeting, which is more focused on overall spending control.

How can a budgeting app help?

A budgeting app allows you to quickly and accurately perform financial tasks such as bookkeeping, forecasting and financial analysis. Instead of having to do it manually on pen and paper, most budgeting apps connect to your financial accounts for you and crunches all the numbers in record time. It’ll also automatically update as you use your accounts.

Compare budgeting apps

Narrow down your choice of budgeting apps to find one that works best for you. Select up to 4 products and click Compare to review their features side-by-side.

Name Product Fee Budgeting Methodology Linked bank account Features Offer
Monarch
Bonus
Monarch
$14.99 per month
zero-based budgeting, envelope budgeting
  • Invite a partner or advisor for free
  • Sync all investments in one view
  • Track spending with clear charts
Offers a free 7-day trial
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Bonus
YNAB
$99 per year
The YNAB Method
  • 100+ free weekly online workshops
  • Breakdown of your income and spending
  • Share your subscription with up to six people
Offers a free 34-day trial
Rocket Money
Rocket Money
From $0 per month
50/30/20 rule, envelope system or use the Rocket Money app to create your own budget category on your phone.
  • Track subscriptions; get cancellation assistance with premium
  • Receive alerts for low checking balances or high credit spending
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Empower Personal Cash
$0 per month
Activity-based budgeting
  • Built-in spend tracking and budgeting
  • Unlimited number of monthly transfers
  • Simplify your family finances with a joint account
Quicken
Bonus
Quicken
From $2 per month
Zero-based budgeting, envelope budgeting, 50-30-20, and more
  • Real-time alerts
  • Fully customizable reports and transactions
  • Personalized debt plan with the Deluxe plan
30-day money-back guarantee. New customers get 40% off their membership for the first year. Available through June 17, 2024.

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5 things to consider when looking for a budgeting app

Whether you’re running a business, digging yourself out of debt or simply trying to get your personal finances in order, budgeting apps can make the process smoother and quicker. Here are five tips to consider when choosing the best budgeting app for you.

  1. Free trials. Look for apps that offer a free tier or at least a free trial so you can test the app before you commit to a paid subscription.
  2. Manual vs automatic input. Most budgeting apps sync with your bank accounts and credit cards to automatically import transactions, but some companies reserve this feature for paying subscribers.
  3. Multi-platform. The best budgeting apps are compatible with Android and iOS, but some are only available on one of the major mobile platforms. If you use more than one operating system on a daily basis, look for apps that offer cross-platform compatibility.
  4. Budgeting methods. You’ll be more inclined to stick to a budget if you choose an app and budgeting method that works with your financial goals and lifestyle. Some apps adhere to the zero-based budgeting approach, while others align with the envelope system. Choose an app that matches the method you’re more likely to stick with.
  5. Cost. Some budgeting apps are completely free, but most require a monthly or annual subscription. Depending on the cost, your subscription could make a dent in the amount of money you’re saving by budgeting. To be on the safe side, choose an affordable app that won’t interfere with your overall budgeting objectives.

Advantages and disadvantages of budgeting

Here are all the reasons you may want to start a budget and things to watch out for:

Pros

  • Spending awareness. If you don’t have a budget, you may be surprised by how much you spend on a daily basis. Things like a bottle of wine or new clothes add up. A budget shows you exactly how much you’re spending and what you’re buying.
  • Improves financial control. People who budget regularly don’t count down the hours until payday. They’ve forecast their expenses and managed their money so they have peace of mind.
  • Makes saving easier. Budgeting makes it easier to identify ways to save because you always know how much you’re spending.
  • Empowers you to reach your goals. It’s possible to reach your savings goals without a budget, but you’ll get there a lot quicker if you have a budget — or roadmap — to follow.
  • Lowers financial worry. When you have a budget, you don’t have to stress about whether you’ll have enough money to pay a bill or save for a goal. Your budget will tell you that.

Potential drawbacks

  • Overwhelming at first. Looking at your expenses for the first time may be stressful, overwhelming or even embarrassing. But remember, knowledge is power.
  • Takes time. You may not see amazing financial results the first month you budget. It usually takes months of evaluating and adjusting to feel like you’re making progress toward your savings goals and lowering your debt.
  • Involves trade-offs. You only have so much money each month. Inevitably, you’ll have to make tough choices about how you should spend that money.

Is there a difference between personal and business budgeting?

Personal and business budgeting share the same basic principles. An effective budget tracks your income and expenses and project what your finances will look like in the future.

  • Personal budgeting apps will help you establish a better spending plan and put money aside for big purchases such as a home, car or wedding, or allocate more money toward fun activities like going to the movies or buying that surfboard you’ve been eyeballing. One popular budgeting option for individuals and families is YNAB.
  • Business budgeting apps perform the same basic functions as personal apps while also taking into account the complexities of running a business. They consider fixed and variable costs, revenue, payroll and debt, and forecast company growth. Two popular budgeting options for businesses are Quickbooks Online and Xero.

How often do you update your budget?

Most Americans a fairly diligent when it comes to their budgets, with 28% saying they update their budget every six months and a further 24% claiming to review their spending habits every time there is a change to their household income.

Bottom line

Budgeting puts you in control of your money and makes it much easier to track spending habits, reach savings goals and pay down debt. And with the right tool or approach, it’s much easier to forecast your financial future and achieve your financial goals.

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