A budget is a plan for how you use your money. No matter how much you earn or how often you get paid, a budget helps you stay on top of your bills, savings and other money goals. It can give you more control and less stress.
How to budget money: step by step
To budget money, follow the five steps below.
Step 1. Figure out your after-tax income
If you get a regular paycheck, the amount you bring home is your after-tax income. This is also called your net income or take-home pay.
If money is taken out of your paycheck for things such as a 401(k) or insurance, add that back in when making your budget. That way, you’ll see your full income.
If you have other types of money coming in — such as from side gigs — subtract anything that reduces that income, such as taxes and <a s new bestie
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Step 3. Track your progress
Write down what you spend, or use a budget app or NerdWallet’s budget template to help.
Pay attention to where your money is going. If you notice areas where you’re overspending, try to cut those costs. If you’re able to make cuts and have money left over, put it toward debt repayment, savings or another financial priority.
Step 4. Automate your savings
Set up automatic savings to make things easier. You can set automatic deposits to an emergency fund, investment or retirement account on your paydays.
If your income changes from month to month, set reminders to move money when you can. You don’t have to do it alone — a friend or online group can keep you motivated to stick to your budget.
Step 5. Practice budget <a s free money.
Priority No. 3: Pay off high-interest debt.Priority No. 3: Pay off high-interest debt.
A different NerdWallet study found that nearly half of Americans (46%) say they regularly stress about their debt balance(s).
If paying off debt is one of your goals, focus on high-interest credit card debt or loans, such as personal and payday loans, title loans and rent-to-own payments.
Look into ways to find debt relief — like a debt management plan or bankruptcy — if either of the following things is true for you:
You can’t repay your credit cards, medical bills or personal loans (i.e., unsecured debt) in the next five years, even if you cut your spending a lot.
Your total debt (not including things like a mortgage or car loan) is as much or more than half of what you make before taxes.
Priority No. 4: Save for retirement (again).Priority No. 4: Save for retirement (again).
Once you’ve paid off your high-interest debt and have some <a s a goal to work toward over time. Just know that your company match, if offered, counts toward that 15% total.
If your job doesn’t offer a 401(k), or if you’ve already put in enough to get the full match, you can look into other options, such as a Roth or traditional IRA.
Priority No. 5: Grow your emergency fund.Priority No. 5: Grow your emergency fund.
Keep adding to your emergency savings. Try to build up enough to cover three to six months of basic living expenses — like rent, groceries and utilities.
It might take a long time to reach this goal. That’s OK. Use the fund when emergencies happen, and try to put the money back when you can.
Priority No. 6: Pay down the rest of your debt.Priority No. 6: Pay down the rest of your debt.
Once your emergency fund is in good shape and your retirement savings are on track, focus on other debts. These payments go beyond the minimum required topay off debt, if you have any remaining.
If you’ve already paid off your high-interest debt, what’s left is probably lower-rate, such as student loans, or tax-deductible debt like your mortgage. Tackle these when the goals listed above are covered.
Try not to take money away from your emergency fund and retirement savings to do this.
Priority No. 7: Save for yourself.Priority No. 7: Save for yourself.
Great job! If you’ve taken all the steps above, you’re in a great position. You’ve built smart money habits and now have more freedom with your money.
To earn more on your savings, think about using a high-yield savings account. These often pay more than regular savings accounts.
You can divide your savings into different buckets — one for emergencies, one for car repairs and one for fun. Some banks will automatically move your monthly interest earnings to your bucket of choice, helping you reach your goals faster. The more you save, the more your money grows. It’s a win-win.
Try a simple budgeting plan: 50/30/20
One popular budget plan is the 50/30/20 budget. If you stick to this plan, you can handle your bills, save for the future, prepare for emergencies and enjoy life, too.
Allow up to 50% of your income for needs
Your necessities — about 50% of your after-tax income — should include:
Groceries.
Housing.
Basic utilities.
Transportation.
Insurance.
Minimum loan and credit card payments. Anything beyond the minimum goes into the savings and debt repayment category.
Child care or other expenses you need so you can work.
If your basic needs go over 50%, you can use some of your “wants” money for now. That’s OK. But if those needs are going over 50% month after month, consider switching to another budgeting model. Switching your budget isn’t a sign of failure. Budgets should work for your life.
If your necessities fall under the 50% cap, review the expenses that stay the same every month, often called fixed expenses. You may find a better cell phone plan, an opportunity to refinance your mortgage or a less expensive car insurance option. Those money moves create breathing room in your budget.
Leave 30% for wants
Separating wants from needs can be difficult. Needs are essential for you to live and work. Typical wants include dinners out, gifts, travel and entertainment.
It’s not always easy to decide: Are organic groceries a want or a need? How about house cleaning services or food delivery? Decisions vary from person to person.
If you want to get out of debt as fast as you can, you may decide your wants can wait until you have some savings or your debts are under control. But your budget should include fun money. If it’s too strict, it’s harder to stick with.
Commit 20% to savings and debt paydown
Use 20% of your after-tax income to put money away for the unexpected, save for the future and pay off debt balances (paying more than minimums). Think about your biggest money goals and use this part of your income to reach them.
The best way to budget money
We like the 50/30/20 budget, but we know it doesn’t work for everyone. If it’s not realistic for you, maybe a 60/20/20 breakdown makes more sense — 60% toward necessities, 20% toward wants and 20% toward savings and retirement.
You might have to try a few different budget plansto find one that works for you. Just make sure any plan covers needs, wants and savings.
Try out a few tools to track your money — like a notebook, a worksheet or an app — and pick the one you’ll actually use.
Your budget builds itself, instantly
Link your bank and the NerdWallet app automatically organizes your spending into needs, wants, and savings. Free and ready in minutes — no manual setup required.
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