How to Budget: Create a Budget You Can Stick to

Your paycheck lands, the rent and the car payment go out, and the rest of the month runs on whatever is left. You can name the big bills. The breakfast bought on the way to work and the delivery order are harder to place. Small purchases like these add up over time. Looking back at your bank and credit card statements can help you estimate smaller expenses accurately. 

What is a budget?

A budget is a written plan for how you'll spend and save your income each month. With a budget, you know where your money goes and where you can cut back. You're also better able to pay all your bills without running out of money during the month.

Money left after your bills can go toward your goals, such as paying down debt or saving for emergencies.

A budget works in a cycle: you set your goals, write a plan, track your spending, and adjust the plan. For more, turn to our budgeting section.

How to create a budget

You build a budget in six steps, in this order. Each step uses what the one before, so the plan you finish with rests on your own numbers.

1. Set a goal for your budget

Start by naming one goal. A goal gives the budget a target: once you know what you're working toward, you decide how much goes to it each month. A short-term goal might be an emergency fund, and a long-term one might be a home. Our guide to financial goals can help you choose one.

2. Figure out your monthly income

Build your budget on take-home pay, the amount left after taxes, insurance, and other deductions come out of your paycheck. Take-home pay is the money you actually have to spend. Count every income source.

Pay from gig, freelance, or hourly work can change from month to month. If yours does, look back over the past six to 12 months and use your lowest month as your monthly income. If no tax comes out of your pay, set some aside before you count the rest: one rule of thumb is 25% to 30% of each paycheck.

3. List your monthly expenses

Go through your bills and your bank and credit card statements from the past three to six months to find what you typically spend each month. Note each bill's due date as you go. From now on, also keep a daily log of small purchases, since they add up and are easy to miss.

List the costs that don't come up every month, such as insurance premiums, annual subscriptions, school fees, and holiday shopping. For a cost you pay once a year, divide it by 12 and set that amount aside each month. Put it all on one sheet, such as our personal budget worksheet.

4. Sort your expenses into categories

Group your expenses into spending categories, such as housing, groceries, gas, and eating out, and give savings and debt payments a category too. Then mark each category two ways: fixed or variable, and need or want. Fixed expenses are the same amount each month, such as rent and phone bill. Variable expenses change from month to month, such as groceries, gas, and eating out.

A need is something you must have to live, to work, or to protect what you have, such as food, housing, transportation to work, and insurance. A want would be nice to have but isn't necessary. 

5. Compare your income with your expenses

Subtract your monthly expenses from your monthly income, and the result tells you whether your budget balances. For example, $4,000 in take-home pay minus $3,700 in expenses leaves $300.

A positive result is a surplus you can put toward savings or your goals. A negative result means you're spending more than you make. 

6. Set a spending limit for each category

Set a limit for each spending category, then lower the limits where you want to spend less. Give savings a line of its own, as one of your budget's expenses.

Add up all limits, including savings. The total should fit within your monthly income. If it comes to more, look for items to trim until it fits.

What should all budgeting methods have in common?

A budget starts with three things: your income, your average monthly spending, and when each bill is due. You gathered all three in "How to create a budget.” What differs is how each budgeting method divides your income. 

Which budgeting method fits you?

The table compares four methods by how each divides your income. If none matches you exactly, start with the closest one and adjust it as you go.

Both the 50/30/20 rule and pay yourself first keep the process simple. The 50/30/20 rule budgets all of your take-home pay into one of three categories. Pay yourself first sets aside money for your savings and debt goals first, and the rest of each paycheck goes to your bills and other expenses.

With the envelope method, you stop spending in that category when the envelope is empty–unless you move cash from another envelope.

What to do when expenses are higher than income

Close the gap between income and expenses from both sides: spend less and bring in more. Start the cuts with spending you can pause, such as new clothes, restaurant delivery, subscriptions, streaming services, and a gym membership. On the income side, a second job is one way to earn more.

Check the timing too. If you come up short at the end of the month, the cause could be bills that fall due before your pay arrives. If you're often late on one bill for that reason, ask the creditor for a new due date that lines up with your payday.

If the gap opened because you lost or changed jobs, update your budget. Our guide to budgeting after a job loss walks you through the process.

If debt payments are what keep your budget from balancing, our guide to budgeting for debt payments covers your options.

How to stick to a budget

Pick a way of tracking you can keep up with. You could keep a daily journal, collect receipts in a folder you go through each week, or update a spreadsheet daily or weekly. Check your bank and credit card statements as well, so no charge slips past.

Set aside time each month to compare what you spent in each category with its limit. When a category goes over, use what you spent to adjust next month's limit, raising it if you set it too low.

The monthly set-asides for once-a-year costs in "List your monthly expenses" go into a sinking fund: money you save bit by bit for a large expense you know is coming, such as insurance premiums or holiday costs. Money saved ahead can help you cover the bill without taking on new debt. Keep that money in a separate account from your emergency savings.

An emergency fund is cash set aside for unplanned bills that aren't part of your routine spending. Build it into your budget as a set amount each payday. How much you need depends on your situation. One rule of thumb is three to six months of essential expenses, such as rent, groceries, and utilities. Even a small amount can give you some security and help keep a surprise bill off a credit card.

Bills Action Plan

1. Collect your numbers. Gather your pay stubs, bills, and the last three to six months of bank and credit card statements. List every source of income, every expense, and each bill's due date before you set any limits.
2. Write your first budget. Set a limit for each spending category, with one of the methods in "Which budgeting method fits you." Add savings as its own line, and set up an automatic transfer for it on payday.
3. Review on the last day of the month. Compare each category's limit with what you spent. If a loan or credit card payment doesn't fit, call that creditor before the due date and ask for a plan with lower payments. Or, contact a nonprofit credit counselor and get any fees quoted in writing.

Key Terms

Take-home pay: Your pay after taxes and other deductions come out.

Fixed expenses: Costs that are the same amount each month, such as rent, a loan payment, or a phone bill.

Variable expenses: Costs that change from month to month, such as groceries, gas, or a heating bill that rises in winter.

Sinking fund: Money you set aside a little at a time for a large expense you know is coming.