Complete Guide | How to Budget Money (Tips, Details, Online Budgeting Tools)


Why Should I Learn How to Budget My Money?


Budget. The word may cause you to shudder, but don’t worry. Becoming a monthly budget planner can be easy, relatively painless, and dare we say it, fun.

Making a budget plan takes commitment and a little bit of time, but in the end, it is a supremely satisfying activity.

After you create your budget, you will feel empowered and in control of your money. It’s not rocket science, and many people feel much better after they learn how to budget, wishing they had done it earlier.

There are a number of things you should know before learning how to budget your money:

  • Budgets are not only restrictive. They don’t just tell you not to spend money on anything. In reality, good budgeting tools will tell you where your money needs to go.
  • Learning how to budget money doesn’t mean you spend less money, it just means you spend purposefully, rather than spending it just by whim.
  • If you are in debt or are saving up for retirement, college tuition, or a major new purchase like a car or renovation, learning how to budget is a great way to achieve your goals in the quickest possible way.
  • Using these budgeting tips can help your personal relationships as well. If your partner resents when you spend $100 on work clothes, or if you get mad when he comes home with the latest video-game console, these problems could be averted by learning how to budget money. You can simply say “Oh, that’s just part of your clothing/entertainment budget for the month. Enjoy it!”
  • Learning how to budget also helps some couples open up discussions about money, which is an area that many families tend to avoid.

Use these simple budgeting tips to learn how to budget your money and get started today.

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Image Source: How to Budget Money

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What Does a Budget Do?

These practical budgeting tips will help you to spend less than you make. No more shock at your credit card statement, or wondering if you can afford to pay the light bill before your next paycheck. If you follow these budgeting tips, you can focus on the future, instead of worrying about paying off your past debts.

Sounds simple, right? Well, it is, in theory. The hard part about discovering how to budget is maintaining your discipline and commitment to the effort.

To help you get there, we’ll look at budgeting tips, strategies for how to budget your money, as well as some budgeting tools that will help you along the way.

Let’s get into the good stuff.


How to Budget My Money: Five Simple Steps 

Maybe you’ve seen some of the slick-looking PDFs going around the internet or you’ve paged through some worksheets in a personal finance book about how to budget, but you have yet to study or fill them in.

Here’s the good news. While some people find them useful, you don’t need any special budgeting tools or equipment in order to make your own budget.

You just need to carve out some time (with your spouse/partner if applicable) and follow these five simple steps to create a monthly budget planner:

Step 1. Set SMART Goals

In order to figure out how to budget and be successful with your money, we must first define success. You have to set goals.

When you play any game for the first time, someone tells you what the object of the game is. If you walked onto a basketball court without any clearly defined goal, it might be a while before you realized the object is to throw the ball through the hoop.

In a similar way, you have to clearly define your money goals before getting started on how to budget. The SMART system can help.

SMART is an acronym that helps you to create useful goals.

A useful goal should be:

  • Specific
  • Measurable
  • Achievable
  • Realistic
  • Time-based

To illustrate what this means, let’s look at an example of how to budget toward a goal.

Let’s say you have zero savings, $30k in student loan debt and $12k in credit card debt.

Your first goal might be to create a cash emergency fund of $1,000 within five months.

After this first goal is achieved, you might want to start using this budgeting tool to work on your credit card debt. Perhaps you estimate that you will eliminate your credit card debt within 18 months.

After that, learn more about how to budget and move on to your next goal, and the next one, and so on.

If, however, you have no debt, you might want to focus your budget on a loftier goal, like building a down payment for a house or new car.

SMART goals are designed to help you make progress toward your ultimate goals without getting frustrated along the way.

BONUS BUDGETING TIPS: It is important to create and sign off on your budget before the month starts. If you retroactively apply your budget to the previous month, it is not helpful. Your budget should not be a description of your past spending.

Rather, you should think of your monthly budget planner as a powerful and necessary budgeting tool to help you gain control of your money and your life.

One of the most common and successful methods for how to budget money is the zero-based budget.

This means that you essentially start with a blank piece of paper (or a blank screen if you’re using online budgeting tools), and then add in the necessary detail to form a complete budget.

Let’s dig into some specific budgeting tips to get you started.

Step 2: What’s my income?

In order to know how to budget money so that you are not spending more than you make, we first have to outline exactly how much you make.

Before each month, you will add up your expected net income and write it on your budget. Net income is the money you take home after paying federal, state, and local taxes and Social Security, as well as expenses like court judgments, child support, and alimony. Most understanding of how to budget your money is really learning about how you obtain and use your money.

We need to deal only in what is real in this monthly budget planner. You will never see the money taken out for taxes, so we don’t even want to consider it for spending purposes.

This step also gives you an opportunity to think about how to budget so that you could increase your net income. You might think about additional side jobs you could take on or selling stuff you don’t need. Consider how small income increases like this could impact your overall monthly budget planner.

A big part of figuring out how to budget money is changing your mindset. Once you change your mindset, you will start having tons of ideas about how to make or save a few extra bucks per week. And when this info is on a piece of paper, you can track the progress you are making toward your goal. 

Now, in the process of reading about how to budget, you probably saw the next step coming…

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Step 3. What Are My Expenses?

Next, we will learn how to budget money for expenses. You will need to plot out your expected expenses for the coming month.

There are a few different methods to doing this, so go with what makes you most comfortable.

One effective method is to view your spending for the past three months, and then make a rough budget based on that in your monthly budget planner.

If you use a credit or debit card, you can usually find this information in your bank’s online budgeting tools and sort your purchases by merchant type.

After you gather this information about how to budget, you might find, for instance, that in a typical month you spent $1,000 on rent and an additional $1,000 on consumer electronics. In this case, you would probably want to lower your electronics budget in order to have more for savings and other more essential categories.

While learning how to budget, examining your spending is a good way to see where you have made money mistakes in the past, and gives you a great opportunity to take back control of that spending.

You can also think of your expenses in three different parts:

  • Fixed needs
  • Variable needs
  • Wants

Fixed needs include items like rent/mortgage, car payments, and insurance premiums. You know the amount you need to budget each month, and these products or services are basic living expenses. These are easy to input on your expenses line in your monthly budget planner.

Variable needs can be things like your water or electricity bill, veterinary bills, groceries, clothing, or vehicle maintenance expenses. You need to know how to budget money for these things, but you may not know exact amounts for each month. Variable needs can be tricky. Make your best guess, and in the event you are unsure, budget for more than you will need. If the electricity bill was $100 past month, but you think you will use more AC this month, you might want to increase your budget to $150. Use common sense and don’t underestimate.

For items like vehicle maintenance, some people use this budgeting tip: they create a kitty that increases every month as you add to it. If you expect to spend $2,400 every year on vehicle maintenance, budget $200 per month, and then stick that cash into a separate savings account so that you have the money to pay for repairs close at hand.

On the flip side of needed spending is spending on wants. Learning how to budget for wants is pretty self-explanatory.

Once you feel comfortable with your monthly budget planner for variable and fixed expenses, only then should you think about how to budget for wants. This includes things like eating out, going to the movies or theater, new cell phones, vacations, your cable bill, hobbies, magazines, alcohol/tobacco, lottery tickets, and anything you don’t really need to survive.

Easy so far, right? Well, step four is where the rubber hits the road in discovering how to budget your money.

Step 4. Execute Your Budget

So, you have learned how to budget money using paper and pen or online budgeting tools, and you have clearly laid out your income and spending plan for the month.

When the first of the month hits, it’s time to put that plan to work!

If you have figured out how to budget your money correctly, you will have a certain amount of money reserved for each spending category.

It takes tremendous discipline to track your spending and force yourself to make spending decisions based on those budget categories.

Budgeting Tools to Make This Happen

A lot of people like the “envelope” or “jar” system. Envelopes or jars can be very effective budgeting tools.

In this budgeting tip, you collect all the cash you will spend according to your monthly budget planner. Then, you divide the cash by category and place each stack of cash in its own envelope or jar.

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Image Source: Budgeting Tools

So, you have an envelope or jar called “Utilities,” one for “Entertainment,” one for “Clothes,” one for “Groceries,” and so on.

Then, when you walk out the door to go to the grocery store, you take your groceries envelope with you, and you know that you cannot spend more than what is in the envelope for the entire month. This forces you to make decisions about how to budget money based on real pieces of paper money.

Interestingly, one study showed that people spend 12-18% more when using credit cards as opposed to cash money.

So, when the cashier tells you your total is $40, but you only have $35 in your envelope, you have to make a decision about how to budget that might be painful. You have to take back that box of cookies, instead of just saying, “Oh, it’s only five bucks. Close enough!”

This is the most important part of the process.

If you realize that you actually need more money in your grocery budget, but you only used half of your entertainment budget, then you can just transfer money from the entertainment to the grocery envelope and adjust your monthly budget planner for the next month.

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Online Budgeting Tools

If this sounds like a lot of work and thought, it is. Online budgeting tools can help with some of these issues.

For instance, Mint Personal Finance can help you learn how to budget and also track your spending by category.

The only problem is that you will have to use a credit or debit card to automatically track your spending. You can manually input cash spending, but it requires extra discipline and thought.

Online budgeting tools can also help you formulate your budget in the first place.

Mint.com offers robust online budgeting tools like a monthly budget planner, along with the tracking features mentioned above.

Monthly budget planner sites like YNAB (You Need A Budget) are helpful for a lot of people and can walk you through the whole budgeting process.

You can get a full rundown of the best online budgeting tools and apps with our review here.

If that’s not your thing, you can use Microsoft Excel or a Google Docs spreadsheet or just good old-fashioned paper to make your budget.

Step 5. At the End of the Month, Review and Create Next Month’s Budget

As you near the end of the month, you should sit down and determine how to budget your money for the following month. This should be based on last month’s budget, along with any adjustments you feel are necessary.

The first two or three months of working out how to budget will be challenging, and you might get things spectacularly wrong in terms of spending goals. But your knowledge of how to budget will grow very quickly after that.

You’ll stop forgetting to track your expenses, you won’t even pick up that unnecessary box of cookies at the store, and you will feel free to spend money on “fun,” now that you have learned how to budget comfortably for this category.

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Conclusion: How to Budget Money for Your Happiness

As with anything worth doing, making a budget plan is hard. When you’re getting started, it’s difficult to know how to budget your money and to remember to track every single expense.

But stick with it.

The rewards for making a budget plan are immense. In the end, your relationships and your money will thank you for it.

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