How to Make a Budget That Works for You

Setting a budget is a great way to control spending and ensure you’ll have enough money to meet your financial goals. Unfortunately, for many, budgets don’t accomplish these important objectives. The biggest reason why budgets don’t work is that those who go through the trouble of creating a budget end up going over budget, time and again.

If you have trouble sticking to your budget, it may be because the roadmap you’ve created to manage your finances is unrealistic and simply can’t work. A budget you can’t live within is, sadly, not much better than having no budget at all.

The good news is that it’s possible to make a realistic budget that allows you to cut spending, devote more of your dollars to meeting your goals, and stick to it long term. These tips will teach you how to make a budget that makes sense, keeps you motivated, and delivers results.

Track your spending before making a budget.¹

One of the most common budgeting mistakes people make is to make a budget without any idea of what they currently spend. It’s difficult to know where your money has gone, and it’s easy to underestimate your current expenditures. If you have no idea where your money is going, making a realistic budget is all but impossible.

While the goal of budgeting is to find ways to cut spending, you don’t want to be unreasonable and set up a budgeting goal you can’t possibly achieve. If gas is costing you $50 a week right now and groceries cost $200, you’re setting yourself up for failure if you budget $10 for gas and $75 for food.

Let technology do the work for you. Tracking your spending can be done using various budgeting apps that link to your bank account and credit cards.² Just be sure to double-check how the apps categorize each transaction. To be more hands-on, you can also write down every purchase you make over the course of the day and add each transaction to a spreadsheet. This approach might take more work, but it can really show you where your money is going.

Ideally, you should track spending for about 30 days to get an idea of your long-term spending.¹ That way, you’ll have a good concept of how your money is currently being used when you make your budget.

Start with budget cuts in key spending categories.³

For many people, there are obvious problem areas that stand out when tracking their spending. You may, for example, discover that you are spending way more than expected on dining out. If that’s the case, this is a good place to start with budget cuts.

Rather than nickel-and-diming yourself to the point where you cut everything you enjoy from your budget, it can be helpful to look for a few big budget cuts. If you savor that latte you buy every day on your way to work, you may decide canceling your cable or downgrading your cell phone service is an easier way to save $100 a month.

Leave some wiggle room in your budget.⁴

Another common budgeting mistake is to allocate every single cent to either spending or savings. There are bound to be a few unexpected expenses that crop up every month. To make sure these surprise costs don’t blow your budget — or force you into debt — budget in some spare cash.

If you can, leave yourself some “unbudgeted” money that you can use if one of these surprise expenses comes up. The right amount will depend on your income and how much you estimate a surprise event might cost. But, if you don’t spend the money in the first month, you can always move it to your emergency fund or even roll it over into the next month, so you have even more wiggle room when an inevitable unexpected expense does come along.

Look at the big picture with annual budgeting.⁵

When you budget, it’s helpful to consider not only the spending you’ll do this month, but also the spending you’ll do this year — and in the more distant future.

For example, in your annual budget, always prioritize:

• Retirement savings
• Debt payoff
• Emergency savings
• Healthcare costs

Allocate money for these expenses along with other essential bills so you can reduce debt, minimize interest and fees, and ensure a more comfortable future.

You should also budget for the big annual expenses that come along at various points during the year. For example:

• Annual car inspections
• Heating oil refills
• Annual maintenance
• Holidays
• Birthdays

Look at an annual calendar and consider going back through old credit card statements to discover a few of these predictable, but irregular, expenses, and budget some money toward them each month. This ensures you’ll be able to stick to your budget when these expenses come up. It’s a lot easier to save $50 every month for holiday spending than it is to come up with an additional $600 every December for gifts and entertaining.