Budgeting & Saving

How to Make a Budget

How Americans
Spend Their Money

Item20152016% Change
Average Income (Before Taxes)$69,629$74,6647.2
Average Expenditures$55,978$57,3112.4
Apparel & Services$1,846$1,803-2.3
Cash Contributions$1,819$2,08114.4
Personal Insurance and Pensions$6,349$6,8317.6
All Other Expenditures$3,845$3,9332.3


Let's face it: Everybody hates the idea of a budget. The word itself suggests nothing more than a grim slog through denial and suffering, much like the word "diet" or even worse, "Adam Sandler film festival."

But if you're missing your financial goals, have trouble paying your bills, can't save for retirement or a rainy day, and aren't able to pay off your credit cards each month, a budget can help. A budget is nothing more than looking at what you're doing with your money and where it goes. In fact, many personal finance experts reject the entire "budget" concept and prefer the idea of a "spending plan." Think of it as a way that you can tell your money where you want it to go, rather than just scrambling to keep up with your bills.

The reality for most people is that, if you want to move beyond living paycheck-to-paycheck, you'll need to analyze your expenses and spending to make sure you've got money for the important things in your life. And that means building a budget.

Getting Started

Your first step is to track your spending. Chances are you're already doing that, between a debit card, checkbook and online accounts or payment apps. Start by getting your last month's worth of transactions and looking at just where your money went. You can download much of that information into a spreadsheet, if you want to work that way, or use some of the budgeting software and apps we'll look at later.

Next, sort what you've spent into separate categories, but don't create too many. For example, home repairs, home furnishings and home supplies can all go into the category of "Housing," along with your rent, mortgage, property taxes and insurance. If you need to break that down more, you can later sort it out by payee.

Then, divide your spending categories in two basic types: fixed vs. variable. Your fixed expenses are the things that don't change every month and that you're likely tied into make for at least another year or two. This is your basic overhead—rent, car payments, utilities bills, student loan payments, commuting passes and so on. The variable category includes all the things that fluctuate weekly or monthly that you can easily cut back on—groceries, entertainment, gas, subscriptions and so on.

Go through your fixed expenses and see if any of those can be reduced. A cut to any one of these costs is going to generate permanent, ongoing savings for you month after month with no other effort. To avoid getting overwhelmed, tackle one or two expenses a week. First, shop around for insurance, then work on your cable/phone/Internet, or look into refinancing your mortgage.

The lower you can keep your monthly "nut" of fixed expenses, the more money you have to spend on yourself and your financial goals. Remember to include seasonal variations in items such as water, gas to heat your home in winter or electricity to power your air-conditioning during the summer. To make it easier, many utilities offer level-billing programs that can give a consistent monthly payment.

Finally, don't forget to make your emergency fund part of your fixed expenses. Just take as little as 2% or $25 a week to start, but get in the habit of paying yourself first. An emergency fund is the vital tool to making a budget work.

With variable expenses, you might be surprised to see how much you're spending on things such as lunches, lattes and other small purchases. If you're grabbing take-out dinners from the drive-in or the local fast-casual chain several times a week, you can easily see how making a weekly meal plan and grocery list can free up a nice chunk of cash.

One way to simplify tracking a $3.50 coffee here and a $6.27 sandwich there is—don't track it. Instead, give yourself a weekly cash allowance to cover your spending on such sundries, and skip figuring where it all went. You may spend less, too. Studies show that we spend less with cash and more with any other form or payment. Plus, seeing how much money you've got left until next week can be a big incentive to cut back.

Budgeting Tools

You don't really need anything other than a pencil and paper to work out a budget and track your spending, but there are a host of online sites, software and apps that aim to make the job easier. You should check these and others to see which ones look best suited to fit your personal style, as well as gauge ease of use, support and features. This very popular site and app connects with your bank and credit card accounts and can automatically download your transactions and categorize them.

You Need A Budget: Also very popular, the website and app is designed primarily a budget-building application that aims to keep you on track from month to month. You can connect to your financial institutions, then categorize transactions to match your budget. YNAB offers a free trial, then it's $50 a year.

Every Dollar: This website and app is based on popular money guru Dave Ramsey's seven-step system to financial success, but you don't have to be working the Ramsey system to use Every Dollar. Basic access is free, but you'll have to manually add all your spending details; for $99 a year you can connect to your financial institutions.

Pocket Guard: This app for iPhone and Android systems connects to your accounts and creates a simple budget for you, and tracks your expenses.

Calendar Budget: This very powerful website is all about your monthly cash flow. As the name suggests, it's based on a calendar approach to when your money comes in and when it goes out. The site is free and, although it has a very enthusiastic group of users, isn't the simplest site to use.

Mvelopes: This approach uses the old-fashioned "envelope system" of allocating your money to categories each month. There's a website and an app, but it's not free, ranging from $4 a month for basic features to a version with financial advisors for $59 a month.

Software: The mainstay is Quicken, a full-featured program that's been around for many years, connects to all your financial accounts, and can track investments and assets. Quicken is packed with features, depending on which version you buy, ranging from $39.95 - $119.95. There is a mobile app, as well.

Alternatives include Money Dance, which is very close to Quicken, somewhat simpler and avoids being over-stuffed with too many options, and sells for $49.95. Other options include CountAbout, a web-based software program that gives you access for $9.99 to $39.99 after a 15-day free trial; and GnuCash, which is free and works for both personal and small business budgeting.

Spreadsheets and notepads: A simple spreadsheet, ledger or even a notebook can be a perfectly good budgeting tool, and you can find dozens of free or low-cost spreadsheets for budgeting that you can download. Creating a spreadsheet on Google Drive is a free way to maintain a spreadsheet that you can share with a spouse or partner, and be able to access anywhere that you have online access.

Budgeting Approaches

The best budgeting approach is the one that works for you, isn't so complicated that you avoid using it, and helps you fine-tune your spending as you go.

The envelope system: This is one of the oldest approaches around: Allocate your money for rent, utilities, groceries and so on, then put that amount of cash in an envelope to pay those expenses. When an envelope is empty, that's it for the month, unless you shift money from another envelope. Since few of us pay our bills with cash today, it can be unsecure and a little ungainly, which is why the Mvelopes website was created. But the envelope system can be good for discretionary spending, such as entertainment, dining out and miscellaneous spending.

The 50-30-20 plan: In this approach, you allocate 50% of your take-home pay to your fixed costs, including housing, utilities, car payments and the rest of your monthly overhead. The next, 20% goes to your financial priorities, including savings, disability or life insurance, paying down debt and your emergency account. The last 30 percent of your paycheck is your discretionary spending, such as food, gas, clothing, entertainment and anything else you easily can adjust to stay within your budget.

This should act as a basic guide and starting point. Young workers starting out may be spending more than 50 percent on basic living expenses but, as you pay down debt and make more money, you'll know that upping your financial goals to get closer to 20 percent should be a priority.

The two-account plan: In this budgeting approach, you add up your fixed monthly expenses, divide that by your number of paychecks, and deposit that money into one bank account every payday. The balance of your cash then goes into a second account for your discretionary spending.

Tracking the first account is simple, since your fixed costs don't vary much from month-to-month. If you build your savings into the fixed account, you're then free to spend cash in the discretionary account however you see fit, knowing that the money need to meet your living expenses and financial goals already is set aside. And, if you need to free up money for another need, you know to focus on that discretionary spending.

Living on Your Budget

Making a budget and then living within it are two different things. Initially, your actual spending and your plan likely won't match up, so you'll need to adjust as you go. Give yourself three to six months to get comfortable with your budget. In the meantime, monitor how you're doing at least once a week to see where you're off track and where you're succeeding.

Finally, connect your budget to a goal. Most people make a budget when they run into some kind of money trouble, which is understandable. But sticking to your financial plan is much easier if you add a goal— big or small—and systematically save toward it, whether it's a pair of designer shoes or a luxury vacation in Paris. As you go, you'll be surprised to find yourself looking for excuses to trim your spending and direct more money to your goal.

Above all, allow yourself to make mistakes, learn and get just a bit better each month, and make sure to leave room for fun.