Take Control of Your Money: 4 Steps to a Master Budget

Budgeting is crucial for anyone who wants to get out of debt, start saving or just control their spending. But how do you make a budget? In this article we simplify the process by breaking it down into four simple steps: Come up with goals, compare income to expenses, brainstorm ideas, and create a budget plan.

We also cover what to do once the budget’s working and point out common budgeting pitfalls as well as how to handle them. Finally, we round things out with a rundown of some killer tools and apps that make budgeting a breeze.

Budgeting 101

Congratulations. That you’re even reading this article means you’ve already begun. With 80% of Americans in debt, the budget-conscious are few and far between. But where does budgeting begin?

Make a Budget Step 1: Come up With Goals

Creating financial goals, both short and long-term, will give you something to work toward and energy when the going gets tough. If a budget is a map that shows the way to your financial dreams, then goals are the destinations on the map. Think of long term goals as the final destinations: things like total financial freedom, a paid-off home mortgage, a healthy retirement nest-egg or college for the kids are all excellent long-term goals. Short term goals are points along the way, and can be anything from making more than you spend each month to having enough money for Christmas next year.

Make a Budget - Financial Goals

A great first step is sitting down and freewheeling ideas. Come up with a list of long term financial goals, a list of mid-range goals, and a list of short term goals. A good tip is to choose mid-range goals that act as stepping stones to long term goals, and short term goals that act as stepping stones to mid-range goals. Breaking big goals down into manageable bites can turn dreams into reality, a little at a time.

Make a Budget Step 2: Assess Your Financial Situation

This is where we pull all the junk out of the closet and start to sort it before we clean the room. It can feel like things are getting worse at this stage. The most important thing to remember is: don’t get discouraged. Maybe things look dismal now, but remember that you’re already ahead of most Americans just by starting out.

To build an accurate picture of your financial situation, you’ll need to know two things:

  1. How much you make.
  2. How much you spend.

How Much do You Make?

Make a Budget - Know Your Income

Making a budget requires knowing your income. Last year’s tax return is a good place to start.

Figure your income, after tax. How much do you make in a month? Of course include paychecks, but also add in any other sources of income, like child support payments, freelance income and so on. Make sure to figure your income after taxes, because for budgeting purposes we’re only interested in money you can actually spend.

How Much do You Spend?

Make a Budget Annual Expenses

Making a budget: When figuring monthly expenses, also add in 1/12th of each annual expense, or 1/6th of each bi-annual expense, and so on.

How much do you spend in a month? Include rent or mortgage payments, gas, food, entertainment and restaurants — everything you can think of. Most of us also have irregular expenses — like insurance payments or property tax payments that only happen once or twice a year. List these and figure a portion of them into your monthly expense total. For example, let’s say you pay property taxes of $1,200 a year, in July. Put 1/12th or $100 of this into your monthly expense figure.

Make a Budget Gain or Loss

If your income less expenses is a negative number, you’ve got more work to do.

Now subtract all your expenses from your income. If your income-minus-expenses is a positive number, then you’re way ahead of the curve, and you can get on to the good stuff, like paying down debt and saving for goals. But if you’re like most, you’ve got a minus sign, and you’ll need to do a little more to start the ball rolling.

Make a Budget Step 3: Brainstorm Some Ideas

Examine Income

Make a Budget - UPS

UPS is always hiring, especially around the holidays. A second job is one way to improve net worth. What other extra income sources can you think of?

First, look at your income. Can you ask for a raise? Get a higher-paying job? Work some overtime shifts? Take on a side job? Do some freelancing? Get creative and see if there’s any way to increase your income. Don’t worry if you don’t think of anything right away. Keep your eyes open for opportunities down the road, and remember there are two sides to this equation.

Categorize Expenses

Break your expenses into categories. How much do you spend each month on utilities? On food? On gas? On clothes? The act of categorizing expenses alone is enough to get some people cutting. If you realize you’re spending $600 a month on coffee, you might resolve to lower that. But beyond categorizing in this way, you’ll want to split your expenses into two different kinds: Needs and Wants.

Needs vs Wants

Make a Budget Needs and Wants

Is Starbucks Coffee a need or a want? That could cause hours of debate.

Expenses like food and utilities are needs — things you can’t do without. “Wants” include eating in restaurants, beer or going to the movies. When you’re trying to change your income/expense number from a negative to a positive, wants are the first place you’ll look to make cuts.

Look for low-hanging fruit in the wants category. If you eat out in restaurants twice a week, maybe you can cut back to once every two weeks. If you pay $70 a month for cable, can you get by with a $10 Netflix subscription instead?

Don’t ignore the idea that some needs are just wants in disguise. For example, is coffee a need? That could be a whole different article, so let’s say it is. But do you need a $5 Starbucks Latte every morning, or could you get by with making your own? What about transportation? Sure, you need a reliable car, but does it have to be brand new, with a $500 payment? Contrary to popular belief, used, inexpensive and ugly does not equal unreliable. And you need food and clothes, but do they have to be name brands or can you get by with generic? Dig into your “needs” list for ways you can fill them while cutting their costs.

Make a Budget by Cutting Costs

Clothes are a “need,” but does a shirt need to cost $45, or can shopping around dig up a better price? This company sells discounted clothing.

Make a Budget Step 4: Create a Plan

Take your ideas from above and make a plan to get your cash flow in the positive. Cut your expenses on paper until they’re below your income. This, finally, is your budget. When creating it, you’ll want to allocate all your money for the month before the month starts — so every dollar is already spent before it even comes in. That way, you’ll be less tempted to spend it on things outside of your budget.

Make a Budget Income

To make a budget, make sure every dollar is spent on paper before you even receive it.

Once you’ve got a monthly budget that works, you may need to adjust it before each month starts to take care of upcoming additional expenses.

Once Your Cash Flow is Positive

Once you’re spending less than you’re making each month it’s time to get after those goals.

Your first goal should be paying down debt. There are two methods: “Debt Snowball” and “Debt Avalanche.”

Paying Down Debt

make a budget debt snowball

The debt snowball works by paying off the smallest debt first, then working up to the next largest, gaining momentum like a small snowball rolling downhill.

The “Debt Snowball” method, advocated by financial guru Dave Ramsey, starts with paying off the smallest debt first, and working up to the next smallest and so on. This creates a sense of accomplishment and an emotional boost as efforts start to pay off. The name comes from the way a little snowball at the top of a hill grows and gains momentum as it rolls down.

The “Debt Avalanche,” recommended by other financial experts, starts with tackling the highest-interest debt first. Unlike the debt snowball, it may not make you feel as good right away, but since you’ll be paying less interest, it creates a bigger financial reward.


Make a Budget Dreams

Once all the boring stuff is out of the way, you can start saving for… well, maybe later. Image source: Lamborghini.com

This is the fun part. Once you’ve paid off all your debt (and yes, it may seem like a long way, but you’ll get there) you can start saving for those goals. You’ll want to build an emergency fund first, of 3 to 6 months of expenses, then start putting money in smart investments such as a 401K, IRA, an account to buy land or whatever else your goals might include.

Budgeting Pitfalls

Watch out for these traps along the way:

  • Stick to it. Following a budget takes discipline. It’s not just what you decide to do now, it’s deciding every day to keep following that budget.
  • Don’t get discouraged. Just wanting it enough to read this article means you’ve got what it takes. Sometimes things may seem bleak, but that’s why your budget is there. It keeps you doing the right things, even when you don’t feel like it’s working.
  • Forget the Joneses. Don’t look around at others and think, “Why don’t I have that?” With 80% of Americans in debt, your best approach to the Joneses is to ignore them. The reward down the road will be freedom and peace that 80% of the Joneses will never know.
  • All budget and no play makes Jack and Jill dull. Put some wiggle room in there for fun, even if it’s only $20 a week to spend on whatever you want. Even the biggest dam in the world needs some amount of regular release.

Budgeting Tools and Apps

If this all seems too complex, don’t feel bad. Tracking and managing every dollar you spend is a huge task, and as human beings, we’re not wired for it. Thankfully, there are some great tools out there that’ll help you track your spending and stick to your budget.

Tools for Tracking Expenses

expense tracking app xpense tracker

Xpense Tracker is a popular expense tracking app. Image source: Apple App Store

If you just want to track your expenses, consider these apps:

Tools for Budgeting

But rather than just tracking expenses, it’s a good idea to get an app or a program that can do all the thinking, reminding and planning for all the steps listed above — including expense tracking. The purpose of these tools is to help create and follow a budget, with the added convenience that every expense is tracked and categorized and added up. Also, your budget travels with you, in your phone or tablet. So consider the following:

Make a Budget Tool

“You Need a Budget” is a popular budgeting tool.

  • Your bank. Most banks with online banking, like USAA or Bank of America, offer some kind of free online budgeting tool/app.
  • You Need a Budget.” ($60) This smart budgeting tool builds your budget by tracking all your incoming money and upcoming expenses. It gives each incoming dollar a job, deals with irregular and unexpected expenses, and ultimately promises peace.
  • Mint.com. (Free) Mint keeps track of income and expenses, organizes bills, and tracks your credit score. Not only does it give a solid picture of how you stand financially, but it suggests ways to whittle down spending. One drawback is that Mint asks for passwords to checking and credit card accounts. They claim their service is secure, but how many news items per year cover supposedly secure online services that have been hacked?
  • DaveRamsey.com. This isn’t an app, but the website of financial guru Dave Ramsey. Dave offers free downloadable budgeting forms, for those who aren’t into the app scene.
  • Budget Pulse/Budget Tracker. Budget Pulse and Budget Tracker both let you keep account numbers secret, entering each transaction manually instead. The pluses are a more secure feeling, but the minuses are that entering transactions manually takes more discipline than most people have.
  • Didn’t find a tool you like here? Look around. There are a ton of free and inexpensive budgeting tools and apps for iOS, Android, and Windows.