7 Easy Steps to Creating a Budget that Actually Works

If saving money was easy, we would all have money in the bank, flush retirement accounts and no financial worries. But managing your finances in the real world can be a challenge – especially when you feel like you’re starting the process with a mountain of debt and set monthly payments.

But that’s no reason to give up hope.

You have flexibility with how you approach budgeting and saving. Some people jump into a full financial lifestyle change, while others have to slowly chip away at past financial decisions to slowly ease into a more comfortable debt-to-income ratio.

Regardless of where you are starting – and how quickly you are moving – on your financial journey, we all start in the same place. Awareness.

Step 1: Figure out your current budget

If “budgeting” is a bad word in your house, it’s time to get over it. We all have budgets, even if you made one without realizing it. How much are you currently spending on things every month? That’s your current budget.

Start by pulling monthly statements from your bank account. Look at the last few months to see how much you’re spending on rent, vehicles, utilities, healthcare, food, entertainment, travel and more. This is not a time to lie to yourself – really dig into the numbers and find every payment. Don’t forget to look at your credit cards also – you’re probably spending on those monthly as well.

There are spending categories we all forget about as well that need to be included in these numbers: subscriptions, HOA fees, automatic payments for services and cash payments to various vendors or events. Every dollar you spend counts.

Once you’ve gathered numbers, arrange them on a spreadsheet or tally them up on paper. Add up the categories and you’ll discover your current budget – your household spending, your entertainment spending, your vehicle spending, etc. Be prepared – the number may be shocking.

Step 2: Look at how much you earn

If you think of your income in gross salary terms, you’re already working at a loss. Sure, you might make $50,000 per year, but that’s not how much you take home. Check your paychecks to find your actual net income. That would be your gross income less the taxes, insurance payments and retirement savings.

Your net income is what hits your bank account every month. That’s the number you’re working with for your new and improved budget.

A salary makes it easy to find this number. If you work multiple jobs or work hourly, you might need to look at several months of paystubs to come up with an average amount of earnings. Or even better – budget based on your lowest recent paycheck. You’ll wind up with extra savings or debt payments every month when you earn more.

Step 3: Set your budgeting goals

Now that you have your raw numbers, it’s time to figure out why you want to budget. Is it to pay off all your debts? To build up an emergency fund? To have more money for travel? All of the above?

A budget isn’t about spending less every month or letting someone else control your spending. You’re in charge of your money and your budget, so you get to decide why you want to clean up your financial picture.

Make a list of your budgeting goals and then prioritize them. Some will naturally lead to others, of course. If your primary goal is to pay off debts, once those debts are gone you will be able to put more money in savings and afford more trips and adventures.

Something must go first. If you prioritize travel over debt, you might have the debt longer, but can take advantage of time you might have for a travel budget now. Only you know what you are trying to do with your budgeting plan. Don’t worry. This is your plan so you can tweak it as you’d like when priorities change down the road.

Once you have a clear picture of your budgeting goal, keep it forefront in your mind. This goal should be powerful enough to help you stop spending money on frivolous things that are keeping you from your goal.

Step 4: Decide on a Budgeting Style

There are financial gurus out there who preach about their particular style of budgeting. The truth is that there are many styles of budgeting that will help with saving and debt payments and they all work. The trick is finding the one that works best for you. The best budgeting method is one that fits naturally to your own mindset and financial goals.

A simple budget. If you’re new at this and don’t like spreadsheets, keep it simple. You already have your total income and your total spending. Look at your spending to see what is reasonable for each category or required for your daily essentials and subtract it from the total amount you earn. The amount left over is what you can use to pay off debt or build up your savings.

Zero-based budget. Take your simple budget a bit further and account for every dollar you bring in. Exactly how much will you spend on groceries? On rent? On restaurants? Every dollar in this style of budgeting has a job to do and once you’ve planned out the jobs, you simply have to follow your own plan. Easy.

50/20/30. Trying to sort out what is reasonable for every category in your budget? This budgeting method takes away the guess work. 50 percent of your after-tax income should go to housing and essentials. 20 percent should go to savings like retirement accounts. The remaining 30 is yours to enjoy with entertainment, travel and other fun things.

If you know that you’re bad about impulse purchases, consider taking out your entertainment and fun money as cash every month. Store the cash in envelopes you’ve labeled for your different budgeting categories. Pay with your cash instead of your card and you can avoid overspending when the impulse strikes. When you run out of cash, you will just have to wait for the next paycheck to get more.

Step 5: Give Yourself a Head Start

It’s very possible that you are trying some budgeting after you’ve gotten yourself in a bit of a debt squeeze. If you’ve accumulated a lot of debt, you’re probably frustrated at how little money you have left for budgeting purposes. It’s hard to boost your saving when you’re spending the bulk of your money on maxed out credit cards and old debt.

If you’re in that situation, a personal loan may be worth investigating for debt consolidation purposes. There are many online lenders who can make personal loans for debt consolidation, and some include only an optional credit check if your credit score might make borrowing difficult.

A single personal loan can then be used to pay off the balances on multiple credit cards. Instead of paying the minimum payment on five different cards, you can use your personal loan for debt consolidation and make one monthly payment instead. This will likely reduce the minimum payment, give you a set payment schedule and let you know exactly when your debt will be paid off based on the terms of the loan.

Just be sure you don’t start spending on the now-cleared credit cards after using your personal loan for debt consolidation – you’ll wind up with twice as much debt to deal with.

Step 6: Take Advantage of Budgeting Tools 

There are many different apps and tools out there that can help you with your budgeting and saving. Of course, there is always the default pencil, notepad and calculator. You can also take advantage of Excel to create your own financial software for your specific needs.

But there is no need to create your own from scratch when there are so many great apps out there that can make the process even easier for you.

  • Your bank features and software. Your first starting point is your own bank. If you haven’t fully explored the services and features you are paying for, now is the time. Be sure you are using the direct deposit feature. (This might also eliminate some monthly banking fees). Check to see if you can split your direct deposit into multiple accounts – this can automate your savings.

Then look at automatic bill pay and transfers. Your paycheck comes in, your bill payments go out the same day, your savings get transferred and you’re left with your discretionary budget. All without lifting a finger. Some banks help to categorize spending as well so you can see how your money comes in and is spent in a single place.

  • Budgeting apps. There are many different budgeting apps out there that can take on the calculations and make it easy to track spending in real time. While the apps have different features and match different budgeting styles, many are linked to your bank accounts and credit cards so that you can see how much you’re spending in every category with every credit card swipe.

Step 7: Adjust as Needed

Your priorities will change. Your income will change. You will run into Christmas shopping or a car repair. It happens and your budgeting will change along with your financial realities.

An emergency fund will help take care of some of the struggles and you can budget for planned expenses like Christmas along with your other categories. But even with the best plans, you will get thrown off track at some point and that’s okay.

Remember that you’re in charge of your own budgeting. Just tweak your numbers, reevaluate, and continue moving forward.