How to budget your money: 6 steps, with an example

A budget is a plan for this month's money made before the month spends it for you. You do not need an app or a perfect spreadsheet to start. You need six numbers in the right order.

The 6 steps

1. Start from take-home pay. What actually lands in your account each month, after tax and deductions. If pay varies, use your lowest normal month.
2. List fixed bills, including the ones you forget. Rent, utilities, phone, insurance, subscriptions, minimum debt payments, and every buy now pay later or card installment plan still running. Those plans are easy to miss because each one looks small.
3. Check the split. Needs, wants, savings. The 50/30/20 rule is a useful guide: about half on needs, under a third on wants, a fifth to savings or extra debt payments.
4. Plan for annual costs. Car insurance, holiday gifts, yearly subscriptions. Divide each by the months until it is due and set that aside monthly. This is a sinking fund.
5. Pay savings first. Move the savings amount on payday, before spending starts. Saving what is left at the end of the month rarely works.
6. Review weekly. Ten minutes once a week: what came in, what went out, what is left for the month. Small corrections beat a big monthly surprise.

Worked example

The problem here is not wants; it is needs at 69%. Two moves fix most of it without touching groceries: give the 365 unassigned a job (savings, which brings it to about 18%), and stop opening new BNPL plans until the current 180 a month runs out.

Keep reading

Build a budget spreadsheet (with formulas) · Paycheck budget calculator · Sinking funds list · How to pay off credit card debt · Snowball vs avalanche example · Holiday budget plan