Whether you’re saving for a down payment on your first home, planning a dream vacation, or simply trying to cut back on unnecessary spending, the first critical step is to create a monthly budget you can live with. Here’s how to get started and stay on track for long-term success.
Step 1: Examine your current financial big picture
Start by listing all your sources of income, including your salary, side gigs, and any regular monetary gifts or other passive income. Then, track your expenses for at least one month to understand where your money is going and get a clear picture of your monthly budget. Be sure to include:
- fixed expenses such as rent/mortgage, utilities, and insurance;
- variable expenses such as groceries, transportation, and entertainment;
- debt payments that you make each month toward credit cards, student loans, etc.; and
- savings and investments that you own.
Pro tip: Budgeting apps such as Monarch or Quicken Simplifi will track and categorize your monthly expenses automatically for a small monthly fee.
Step 2: Set clear short- and long-term goals
Your monthly budget should reflect your unique priorities, with common objectives that might include:
- paying off high-interest credit card debt;
- establishing a safety net in case of job loss or other emergencies; and
- saving for a home or other milestone investment.
Once you establish your goals, assign specific dollar amounts to each category. For instance, if you aim to save $6,000 for a down payment in one year, you’ll need to set aside $500 per month toward that goal to stay on track.
Step 3: Categorize and prioritize your spending
In general, you can sort monthly expenses into one of three categories: needs, wants, and savings. Needs are essentials such as rent, groceries, and healthcare. Wants cover discretionary spending, such as dining out and concert tickets. Savings include emergency funds, retirement contributions, and other interest-bearing investments.
Pro tip: As you prioritize your spending based on these three categories, it may be helpful to use the 50/30/20 rule: allocate 50 percent of your income to needs, 30 percent to wants, and 20 percent to savings. From there, you can adjust based on your personal lifestyle and goals.
Step 4: Cut unnecessary expenses
Once you categorize the spending within your monthly budget, look for areas to trim. Ask yourself the following:
- Can I negotiate for a lower rate on things such as internet or car insurance?
- Are there unused subscriptions that I can cancel?
- Can I meal-prep instead of eating out during the week?
- Are there more cost-effective transportation options in my area?
Pro tip: For one month, try a no-spend challenge, a budgeting strategy where you commit to spending only on essentials for a set period to help you save money and reset your spending habits.
Step 5: Automate monthly bill payments and savings
Set up direct deposits into a savings account so that you’re not tempted to spend it. Many banks allow you to create sub-accounts labeled for specific goals, such as “Emergency Fund” or “Vacation Fund.” You can also automate most monthly bills to ensure you never miss a payment or incur fees that could hurt your credit score.
Step 6: Make time to monitor and tweak your budget
A budget isn’t static—it can and should evolve with your lifestyle, unexpected financial obligations, and other unique circumstances. Take time to review your monthly budget and goals throughout the year, checking for areas where you overspend and adjusting your “buckets” accordingly.
Pro tip: Use the envelope method for discretionary spending—withdraw a set amount of cash for entertainment and dining out each month. Once the cash is gone, you stop spending.
Step 7: Keep your eye on the big picture
Financial success requires a bit of old-fashioned “stick to it” attitude. These simple strategies can help you stay accountable:
- Share your budget goals with a trusted friend or accountability buddy.
- Reward yourself (within reason) when you reach a milestone goal.
- Stay motivated by checking in and reminding yourself of your “why.”
Budgeting realistically isn’t about deprivation; rather, it’s about financial freedom. By tracking expenses, prioritizing savings, and making adjustments along the way, you’ll build healthy financial habits that set you up for long-term success.