5 Steps to Create a Budget that Actually Works

 The key to successful budgeting is knowing where you want to go and then working backwards from there. Set SMART financial goals, know your fixed expenses, and track your spending habits today so that you know where to cut back for tomorrow.

Most people think about budgeting as restricting their spending so that they’ll have a nest egg for some far-off time in the future. It all feels very… intangible.

But good budgeting isn’t about limiting yourself or thinking in hypotheticals  it’s about allocating your finances for what really matters. You want to have more money for the things that are important to you while avoiding spending money on what isn’t important.

Plus, with life getting more expensive, staying on top of your finances will ensure you have enough money to cover your bills now, while also still enjoying yourself and planning for the future.

Once you get comfortable with budgeting, you’ll:

  • Be able to plan for the future so that you’ll feel less anxious about what’s to come.
  • Have more money for the things that you really care about.
  • Stop wasting your time and money on things you don’t care about.
  • Be able to plan for that dream trip, house, etc.
  • Have more control of your life.

If you’ve been trying to figure out how to budget your money better, we’ve got you covered.

1. Set Your Budgeting Goals

Let’s face it, most of us can’t just save money for the sake of money. We need a purpose for our saving or else budgeting will feel pointless.

What are some good reasons to set budgeting goals?

  • Saving up for a vacation
  • Paying off existing debt
  • Saving for a house
  • Planning for retirement so that you don’t have to work forever

Tangible goals will make your budgeting easier  if you clearly know what you want to accomplish, you’re more likely to commit to it.

You’ve probably heard about SMART goal setting, and it’s a good idea to use it for setting your budget:

  • Specific. What do you want to save for?
  • Measurable. How much do you need to be saving from every paycheck?
  • Achievable. Is it even possible to reach this financial goal or is it a dream?
  • Realistic. Can you reach this goal with your current income and expenses?
  • Time-bound. When will you reach this goal by?

You want to set your financial priorities while still being realistic enough that you won’t give up on the whole thing when an unexpected expense crops up.

Once you figure out why you want to budget or save money, it’s time to move on to the next step.

2. Know Your Fixed Expenses

Before you can start planning how you’ll budget your money, you have to figure out your fixed expenses. This is so you’ll know know how much money you absolutely have to pay out every month, regardless of any changes to your income.

Your fixed monthly expenses could include the following:

  • Rent or mortgage
  • Utilities
  • Insurance
  • Loan payments (student loans, auto loans, etc.)
  • Minimum credit card payments
  • Desired savings, investments, or additional debt payments

That last point is especially important. You must calculate how much you want to save, invest, or use to pay down debt first. If you’re setting aside a bit of money but still paying high interest on lingering debt, or saving for a trip but have nothing in case of emergency, then you’re not really getting ahead with your finances.

Once you know your fixed expenses, determine what’s left. This is your “spending allowance.” You can spend this on whatever: take-out, wine, travel — basically anything that makes your heart sing.

To find what’s left, do the following:

  • Total your fixed monthly expenses
  • Figure out your monthly take-home pay
  • Subtract your fixed expenses from your take-home pay

Of course, if something big happens (illness, car repairs, etc.), you may need to spend money on that and have less for fun stuff. That sucks, but it’s also why you should always have an emergency fund.

3. Track Your Spending

You have to know where your money’s going if you want to get better with budgeting.

Your fixed expenses will roughly remain the same every month. However, your variable expenses will always fluctuate, as they depend on your spending habits (lifestyle, eating out versus cooking, and so on).

This is why we have to track our spending: to see exactly what our variable expenses are costing us.

For one month, track your spending without making any changes to your normal buying habits. Then, at the end of the month, take a look at where your money went.

Once you’ve tracked your spending for a month, review to see where your cash went and where you can cut back. We all have financial leaks that can be filled when we take a realistic look at our spending.

Keep in mind that you don’t have to cut back on everything. You just have to work on removing the purchases that don’t match the goals and values you set in Step 1.

How can you track your spending?

  • Old-school spreadsheet
  • Budgeting apps
  • Your credit card

Since everything is digital these days, it makes sense that budgeting your money can go digital, too. Sure, you can use an old-fashioned spreadsheet (and you may prefer the accountability of manually tracking everything). But if you’d prefer something more high-tech, opt for an app.

Instead of manually evaluating your spending to make sure you stay on track, budgeting apps monitor and analyze your spending. This, in turn, can make it easier for you to see where your money is going, and adjustments you can make to improve your cash flow.

Read more: Best Budgeting Apps to Take Control of Your Finances

4. Embrace Frugal Living

One of the most important steps when budgeting your money is learning to embrace frugal living, so that you’re able to reach your financial goals without feeling limited.

What are some practical tips for living more cheaply?

  • Prepare more meals at home
  • Find ways to cut back on your grocery bill
  • Keep your eyes open for deals and promotional offers
  • Look for free events in your community so that you don’t break the bank on entertainment
  • Consider cutting one fixed expense that you don’t use that much
  • Find free or low-fee banking options
  • Avoid common money wasters (late fees, lottery tickets, impulse purchases, and food that will end up in the trash)

Based on the spending habits you tracked in Step 3, you should be able to spot some areas where you can embrace a more frugal attitude — so that you can stay focused on the financial goals we planned earlier.

 5. Pick a Budget Method

The beauty of running the numbers and actually tracking your spending is that it makes it easier to execute those SMART goals. Once you know how much money you have coming in and out, you have a better grasp of how to budget your money.

There are dozens of budgeting methods out there, but one of the most popular ones is the 50/30/20 method. It breaks down as follows:

  • 50% of your income on fixed expenses (rent, mortgage, groceries, etc.).
  • 30% of your income on wants and lifestyle choices (fun and entertainment, dining out).
  • 20% of your income toward debt payments and saving.

Now, of course, your income may not fit into this model. If 50% of your salary goes to rent alone, then it’s going to be hard to work in anything else.

But that doesn’t mean you should give up on your financial goals completely. There are plenty of other budgeting options out there (including some unusual budgeting methods), so use what works best for you.

Top budgeting apps


Under the YNAB method, you give every dollar a “job” and then adjust as needed between paydays/inflows of money. The “To Be Budgeted” box at the top of your YNAB display shows you how much money has come into your account that hasn’t been assigned a job. The goal is to always have TBB at $0.00.

You’ll create categories and fund them with the available money in your checking account. Then as transactions are pulled in from  your account you’ll assign each transaction to the appropriate category.

This will give you a running total of how much left you have to spend in each spending category. If you overspend in a category you can move money from another category to make up for the overspending.

If you have money left over in a category at the end of the month, you can move it, either to a category that is short, or into savings. Or it will roll over – giving you more money to spend in that category to spend next month.

Check out our full YNAB review.


Simplifi was created by Quicken which is a powerhouse in the world of financial software. The Quicken products have been used by over 25 million people over four decades.

Simplifi connects to your bank accounts and automatically pulls in all of your transactions for easy categorization. It also recommends a budget based on your past spending habits but that is fully customizable.

You can also set goals and see your progress as you work towards them. It also allows you to pull reports so you can see exactly how you’ve spent your money. This can be a real eye-opener.

In addition to your bank accounts, it can also connect to your loans, savings, and investment accounts so you can see your whole financial picture at a glance.

Check out our full Simplifi review.

The Bottom Line

Here’s the main takeaway of this article: budgets without a purpose won’t work. We simply won’t stick with them if we don’t have a tangible reason to.

Instead, give a reason to your budgeting. Whether you’re saving up for a one-off trip or for your future retirement, you need to align your budget goals with your values.

Then, set a spending plan after figuring out how your fixed expenses compare with your income and financial goals. Cut out whatever isn’t necessary or important to your goals.

Lastly, use an app or spreadsheet to track your money and keep planning ahead, with a fluid approach that allows you to adjust your spending as your bank account grows.

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