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Learn how to budget in 6 steps

August 29,2023

Author: Martha Harbell

Where's your money going? Do you know how much money do you actually have? Or how much you need to afford the life you want? Answering these questions is easy: make a budget! It’s the best way to understand your financial situation and make a plan. Plus, budgeting has mental health benefits - getting a handle on your money is key to feeling confident in your future. So let’s break it down - here’s how to create a budget in 6 simple steps.

1. Add up your income

Make a list of all the money you have coming in each month. This includes:

  • Salary
  • Government benefits, like disability payments or employment insurance
  • Interest from savings accounts
  • Dividends from investments
  • Capital gains (this is what you earn when an asset sells for more than you initially paid for it)

Note: If you’re making a household budget, include the income of everyone in the household. Do the same for expenses.

2. Add up your expenses

Figure out where your money is going by making a list of your expenses each month. This includes:

  • Rent or mortgage payments
  • Utility bills, like water, electricity, and heating
  • Groceries
  • Gas and/or public transportation
  • Credit card bills and other debt payments
  • Child care costs
  • Communication (phone, internet, cable, etc.)
  • Entertainment (streaming subscriptions, ordering takeout, books, etc.)

3. Calculate your balance

This math is simple. Take your total income and subtract your expenses. If it’s a positive number, that means you earned more than you spent (awesome!). If it’s a negative number, that means you spent more than you earned (not so awesome).

This balance tells you how well you’re managing your money and gives you a baseline to help you plan for the future.

What’s the 50/30/20 rule?

When you look at your expenses, you might want to keep the 50/30/20 rule in mind. This rule, made popular by Elizabeth Warren in her book, All Your Worth: The Ultimate Lifetime Money Plan, explains how you should divide up your expenses in order to maintain healthy finances.

Here’s the breakdown:

  • Essentials (50% of your expenses)
  • Wants (30% of your expenses)
  • Savings (20% of your expenses)

4. Decide on your goals

What do you want to get from your money? Are you thinking short-term, like setting up an emergency fund or getting a new TV? Or do you have long-term goals, like buying your first home or saving for retirement?

Making progress on your goals can be simple. You just need to 1) know what they are and 2) include them in your financial plan. Starting small can make a big difference in the long term. For example, if you invested $100 a month for 40 years at a 5% interest rate, you’d end up with $152,602!

5. Make a plan

Go over your balance and your goals to make a plan for what to tackle first. For example, if you’re spending too much, take a closer look at all of your expenses - there may be opportunities to cut back. If one of your goals is to start building an emergency fund, you may want to set up pre-authorized contributions to a high interest savings account.

Just remember, take it one step at a time - don’t panic, don’t rush.

6. Stay on track

Budgeting is like any good habit - you have to keep at it if you want to see results. Set up reminders to check in on your financial situation and track your progress. That way, you can keep your budget on track and adjust it as needed. After all, changes in your life will translate into changes in your budget, whether it’s a losing a job, adding a family member, moving to a new place, or simply re-prioritizing your goals.

Learn more about managing money

What's a pre-authorized contribution plan?
Saving in your 20s, 30s, 40s and beyond
8 tips on managing your money during a crisis