A Complete Guide to Budgeting

Budgeting is all about learning money mindfulness, goalsetting, and patience. You aren’t just making a list of rules to follow when spending your money; you’re also trying to become a smarter spender, reinforcing habits that will deliver benefits throughout your life.

If budgeting feels overwhelming, don’t worry! Building a budget may require some careful planning and decision-making, but this guide will walk you through each step.

If your finances are tight at the moment, taking this time to look at the whole picture and make a plan can give you more clarity and help you determine the best next step for your finances. We know that when you’re living paycheck to paycheck, it can be tempting to ignore your bank account instead of tracking every dollar.

Assuming your budget is realistic, you might actually find that spending decisions become less stressful over time because you won’t get stuck worrying over the consequences of each decision. Instead, you can reference your monthly spending versus your available budget and let those numbers determine your spending decisions for you.

First Step: Examining Your Income and Expenses

Budgets are a balance of income and expenses, so this is an important place to start. Figure out how much after-tax income you make in a given month—this is the absolute ceiling for your budget.

Then, add up your spending from the previous month (or look at averages of the last few months) to get a sense of your spending habits. How much are you spending? How does that amount compare to your monthly income?

Break down your spending by category, such as groceries, rent/mortgage, gas/travel, clothing, and so on, and evaluate your spending levels. Are there any spending categories that surprise you? Any categories where you think you could easily trim your spending next month?

If you have a spouse or partner, this is a great opportunity to sit down and have some larger conversations about your spending habits relative to your income. For example, would it help your financial situation to add a second source of income through a side gig or second job, and how would that work?

Approach budgeting with a problem-solving outlook. Don’t be discouraged if you’re struggling to cut costs. Practice patience and explore your options to widen the gap between your spending and your take-home pay.

Building an Emergency Fund

Life is unpredictable. In the event that you have to deal with unexpected living costs, high medical bills, a loss of income, or any other unforeseen circumstances, you’ll be grateful to have an emergency fund that can absorb these costs.

In an ideal world, your emergency fund includes enough money to cover 4-6 months of your living expenses. If you can’t put that much away right now, commit to adding to your emergency fund every month.

When those unexpected costs arise down the road, you’ll be grateful you started putting money away today.

Saving for Large Purchases or Expenses

For most people, the biggest financial decisions in life require advanced planning and saving. Whether you’re buying a home, planning a wedding, or saving for your child’s college tuition, it’s important to account for these savings needs—and their timelines—when building your budget.

If you’re saving for multiple large expenses at once, prioritize those that falls into the “needs” category ahead of those that are merely “wants.” If you need a car for your work commute, for example, that goal needs to be met before you spring for a fun vacation. Curious to see just how quickly your savings can add up when you tuck away money every month? Check out our online savings calculator to see how your savings can grow at different interest rates.

If you’re juggling multiple types of debt, you’re probably trying to figure out how to prioritize your debt payments in the most efficient way. In general, there are two approaches to repaying debt that you’ll want to consider based on your financial situation:

• Start with the highest-interest debt: If you want to pay the least amount of interest, prioritize your debts according to the interest rate, starting with high-interest debts such as credit card balances and working your way down to debts that generate the lowest monthly interest.
• Start with the smallest debt: If you’re struggling to keep up with the minimum payments on your debts, try to pay off one of the smaller balances owed to alleviate the monthly burden on your budget. Once the balance is paid, you can reallocate some or all of that money to a different debt—ideally one with a high interest rate.

Creating a budget is one of the most beneficial actions you can take to secure a brighter financial future. Budgeting gives you greater awareness of your money, smarter spending habits, and the peace of mind that comes with having a plan for your financial future.

Remember: Budgeting isn’t a pass/fail process. It’s a practice that yields benefits gradually over time. By remaining diligent in creating and sticking to budgets, you can learn from your past spending decisions and make adjustments to your money management habits that will serve you for your entire life.

As your budget teaches you about your financial habits, you’ll be able to make future money decisions with full confidence in yourself and the financial plan you’ve created.