10 Steps for Making a Successful Budget

When you’re first trying to get a grip on your finances, budgeting is a great place to start. However, it’s often presented in personal finance books with complicated-looking tables where you’re trying to force the reality of your own spending with vague descriptions that don’t really match up with your thinking. For many, it ends up with frustration.

So, if budgeting is so useful, how can someone budget successfully? The core of any budget is knowing where your money is going. According to a survey by Intuit, 65% of Americans have no idea how much they spent last month. Another vital element of budgeting is financial goals, and a CNBC survey indicates that 75% of Americans have no clear financial goals.

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    Why make a budget?

    So, what is a budget? A budget is simply an estimation of your income and expenses for a set period of time, usually a month for personal and family budgets because many bills are on a monthly billing cycle. You estimate how much you’ll bring in and how much of that you’ll spend on a bunch of different categories.

    Why do this? If you start with how much you’re bringing in and subtract from that the expenses you know you’re going to have to cover, that reveals how much money you have left in the areas of your life where you have choices – food, household supplies, entertainment, hobbies, and long-term goals, mostly. You can set short term goals in those areas so that you can be sure to have money for your long-term goals.

    The next question is how do I budget.  As you can see, the process starts with three things: your goals, your income, and your spending. Those are the core steps for making a budget that will work for you.

    1. Figure out your goals

    The best place to start is with goals, because they provide the reason for doing everything else. We all have big dreams in life, but if you want them to start coming true, you have to turn them into actionable goals. Start by figuring out one or two big long-term things you want in life. What really resonates with you and makes you excited just thinking about it?

    Once you’ve figured out a core long-term goal or two, turn them into SMART personal finance goals. A SMART goal is one that’s set up for you to start taking immediate action on by hammering that goal down into something specific and actionable. You’re defining what you need to do to get to your big goal, and that immediately translates into what you need to do each month to get to your big goal.

    2. Note your monthly income

    As noted above, the second core element of a budget is your monthly income. How much do you make in a single month?

    For some, this is easy – they’re paid monthly or twice-monthly. For those who are paid every other week, assume that your budget is based on two paychecks. If you’re paid weekly, assume that your budget is based on four paychecks. If an “extra” check comes in, use that to cover irregular bills, to make extra debt payments, or to make extra contributions to savings.

    3. Track your spending

    The third element of a good budget is your spending. For a budget to work, it needs to be based on the reality of your personal spending, so you need to start tracking it.

    If all of your expenses go through a credit card or bank card, this is easy. You can just pull out recent bank statements and credit card statements to review your spending.

    If you use cash with any frequency, you need to keep track of those receipts over the course of a few months. Just start saving receipts for everything you pay for in cash.

    4. Group your expenses

    Once you have at least a couple of months of receipts saved up, assemble a starter budget that works for you. Start by grouping all of your expenses into groups that make intuitive sense to you. It should feel completely natural as to what items group together, so that you just know what group an expense would go into when you spend that money. Do this with every individual expense. There are software packages that can help with this, such as Mint and You Need a Budget.

    Once you’ve grouped all of your expenses into sensible groups, total them up and then divide by the number of months you considered. So, if you used three months of receipts and statements, divide the total of each group by three. The more months you use, the more accurate your budget will be in terms of capturing a “typical” month.

    Just make a list of all of the categories and the “per month” amount in each one. Write your total monthly income at the top, and you’re ready to go!

    5. Figure out cutback areas

    Now it’s time to turn that “starter budget” into something that works for you. You’ll want to add a new line or two, one for each of the goals you defined earlier. Decide a reasonably small amount you’ll contribute to those goals, and write that down. Now, subtract the total of all of the spending categories including your goals from your total income.

    You might find that the resulting number is negative. That’s okay — don’t panic. That’s how much you need to cut out of your budget, particularly from flexible spending categories.

    6. Make an actionable plan

    How will you go about doing this? You need to figure out which categories you can cut back on a little without making your life miserable. If your budget makes your life unpleasant, then you will stop sticking to it and you’ll never get ahead.

    Go through each item on your list and ask yourself whether these expenses contribute to your lasting happiness. If you say “YES!,” then leave it alone. If you say “some of it” or “not really,” then you have a prime target for cutting back. Give yourself a number in that category to shoot for over the coming month.

    [Read More: A Realistic Budget for People in Their 20s]

    7. Adjust your habits

    Now it’s time for action! A big part of how to budget successfully is adjusting your habits and routines. What categories did you cut back on? What new goal categories did you add? Those are ones that need real attention.

    For the cutback categories, a good strategy is to think about which expenses in that category are unimportant to you. Which ones really don’t bring you lasting happiness? Don’t cut the ones that really bring you lasting joy. A good threshold is to ask yourself whether you’d be happy with this expense looking back on it after a month. What expenses from a month ago now seem wasteful? Those are good ones to start cutting out. Work on forming new habits that don’t lead you to those expenses, like changing your commute or bringing lunch to work with you.

    For goals, a good way to make sure you stick to those categories is by automating them. If you’re saving for a specific goal like a down payment, consider opening a savings account at a remote bank, — one that’s not easy to access — and set up a small weekly transfer into that new savings account from your current checking account so that after four weeks, you’ve moved your budgeted amount in there.

    8. Evaluate after a month

    Stick to these changes for a month. Consider it a financial 30-day challenge. At the end of that month, sit down and evaluate how it went. Compare your actual expenses at the end of the month to your budget from the start by sorting all of your expenses for the month into groups. Did you stick to your new habits? What was easy? What was hard?

    If it was an easy success, congratulations! You have a great path going forward. Just rinse and repeat and you’ll get to your goals!

    9. Make adjustments and repeat

    What if it wasn’t an easy success? You may have to try some new approaches.

    If you were just a little off, it’s likely that you just need to tweak your budget a little. Try using these strategies for fixing common budget problems and see if they help.

    If you were way off, you may need to try a different approach, one with a little more structure. There are a lot of good budgeting systems out there that offer more guidance and different approaches to help you stay on track. Find a new budgeting system that’s right for you.

    10. Keep checking in

    A budget isn’t a one-and-done thing. It’s a monthly pattern. Over time, it will become deeply ingrained in your habits and you won’t need a formal budget any more, much like taking training wheels off a bicycle when you’ve mastered it. Until then, keep going through the cycle of evaluating your budget each month, tweaking it, and repeating until all of the new habits feel natural.

    When you make it there, you’re moving toward lasting personal finance success, achieving your goals, and living the life of your dreams!


    Trent Hamm

    Founder & Columnist
