6 Simple Steps to Building a Better Budget

If the thought of creating a budget makes you want to run for the hills, you aren’t alone. Budgeting can often feel overwhelming, especially if looking at bank statements or even just thinking about your money makes you feel uncomfortable. But the truth is, your budget is simply a plan for your money—one that has the potential to improve your financial health, empower you to live within your means, reduce financial stress, and help you build the life you want.

Why You Need a Budget

A successful budget can reduce your day-to-day stress by helping ensure you’ve got all your financial needs and responsibilities covered. Though there are all sorts of budgeting methods available, the goals remain roughly the same. 

Tracking your spending

When you see exactly where your money is going, you can pinpoint areas where you may be overspending and find ways to reallocate those funds for better use.

Reaching your financial goals

Whether you’re more focused on short-term goals, like a home repair project, or long-term goals like saving for retirement, you’ll have a much better chance of achieving them with a budget. Creating and sticking to a budget gives you the opportunity to take your goals out of the realm of wishful thinking and turn them into reality. 

Controlling your debt

When you create a budget, you may be able to see the bigger picture and gain a clearer understanding of your debt. You might find that you can better manage your bills simply by being more frugal with your income. Or you may discover consolidating your debt or taking out a personal loan can help you save money over time. Creating a budget lets you tackle your debt head-on with a realistic plan to pay it down. 

Improving your discipline around money

Budgeting can help you form habits that affect much more than your bank account. A well-thought-out budget can teach you to be more intentional with your choices, increase discipline, develop better boundaries, and better understand what you truly value. Plus, effective budgeting can help decrease anxiety and foster more positive feelings about your future. 

How to Build a Better Budget: 6 Simple Steps

Like many endeavors in life, the hardest part is getting started. Taking a methodical, step-by-step approach can help simplify the process and minimize any anxieties you have about creating your budget.

1. Determine your annual spending capacity

Rather than starting with your monthly income and expenses, try looking at how much you typically make and spend in a full year. Why? Because there’s no such thing as a “typical month,” and some expenses aren’t monthly. Add up all your income sources together—even your occasional boosts like bonuses, commissions, or tax refunds. Then, divide by 12 to give you a good estimate of what you may have to spend each month. From there, you can determine which months may have more expenses—like around the holidays—and let you plan which months you may need to cut back to save. 

2. List your non-negotiable expenses

For this step of the budget-making process, write down each of your non-negotiable costs. This list may include: 

• Rent or mortgage payments

• Car payments

• Groceries

• Basic utilities

• Childcare or school tuition

• Insurance premiums

• Minimum debt payments (credit cards, car loan payments, etc.)

Some costs are fixed expenses, meaning you know exactly how much they cost each month—like your rent or car insurance. Variable expenses, on the other hand, can be harder to calculate.

To figure out your variable expenses, try to find the average cost by looking over the past 12 months of bills. For example, gather 12 months' worth of electric bills, add up the total and divide by 12 to get an average cost. For partially documented expenses, like trips to the grocery store where you pay with cash, do a review of the past few weeks to get a good estimate of how much you spend. 

3. Create spending categories

Create categories for all your expenses—like housing, transportation, food, utilities, healthcare, and insurance. Make sure to separate your “needs” from your “wants,” so you know how to prioritize if you ever need to tighten your budget.  For example, you need to budget for groceries and food each month, but you may want a nice dinner out. By putting these into separate categories, you are able to better see how much money you can save if you need it. 

4. Compare multiple months to see trends

Comparing your expenses from month to month can give you a clearer understanding of your spending habits, particularly when it comes to problem areas. You may find, for example, you’re spending way more on takeout meals than you realized. Once you see these patterns, you can make changes until you find a better balance in your spending.. 

5. Prioritize savings and debt repayment

Most Americans have some kind of debt. A budget can help you pay it down and start saving for the future—as long as you’re willing to commit. Within every month, set aside funds for paying back your debts—like student loans or credit card bills. But don’t stop there. Making room in your budget to save can help you in the long run. 

Some savvy budgeters find success in prioritizing savings by “paying yourself first.” When you pay yourself first, you set aside money for your financial goals before you spend it on immediate wants. 

Depending on your goals, paying yourself first may include: 

• Building an emergency fund for unexpected expenses

• Contributing to a retirement account

• Saving for your kids’ education costs

• Getting out of debt faster

• Purchasing a home

• Replacing a car

• Buying insurance

• Contributing to your health savings account (HSA)

If you live paycheck to paycheck, prioritizing these non-immediate needs may sound daunting. But don’t worry too much about the number you’re contributing. “Almost everyone can save at least 1% of their income,” notes financial blogger J.D. Roth. It all adds up. 

6. Allocate for fun

No matter your approach, you won’t stick to any budget for very long if you don’t make room for enjoying life. Once you’ve committed money toward your necessities and your financial goals, give yourself permission to budget in some fun: sports or music lessons for the kids, dining out, local travel, etc. Even while you're prioritizing saving for the future, it's important to take care of your mental health and budget for the present moment, too. 

How to Maintain Your Budget

Your budget is an essential part of your financial health. Once you’ve created yours, set yourself up for success by reviewing your finances regularly. 

1. Check in often

Check in on your budget on a regular basis to ensure everything is on track. Remember that a budget is simply a money management plan, not a rigid set of rules. The more you nurture it, the healthier it will be. 

2. Automate where possible

Worried you may forget important bills and throw your budget off course? Automating your recurring payments can be a budget lifesaver. Set up autopay for your credit cards, utilities, and other regular expenses, making sure to keep track of when those payments are due so you’ll always have enough to cover them. You can even set up automatic withdrawals for your savings and 401(k) contributions with your bank and employer. 

3. Use budgeting software and apps

Personal finance apps like Trim¹, Mint, and Acorns are popular options, and there’s now an app for practically any activity connected to your budget. Whether you want to track your spending, set savings goals, make mobile payments, view all your accounts in one place, get customized alerts, or do just about anything else, your favorite finance app can probably do it.

4. Listen to financial podcasts

Similar to mobile apps, podcasts have become a huge part of our culture. With countless options available, you can find podcasts covering everything from money-saving tricks to advice on retiring early. 

5. Join a budgeting community

Feeling alone in your budgeting journey? Join a financial community! Money is a stressful and emotional topic, and talking with others who are on a similar path can make you feel heard, supported, and understood. It’s also a great way to get tips from more seasoned budgeters and learn from others’ past mistakes. 

The Bottom Line

Creating and maintaining a budget can change the way you think about and manage money for the long term. Not only can building a budget help you curb your spending, pay down debt, and save, it can also help you develop better financial habits that can have a positive impact on other areas of your personal life. 

How to Create a Budget FAQ

1. I’m a first-time budgeter. Where do I start?

If you’re a first-time budgeter, start with the basics to avoid getting overwhelmed. Calculate your after-tax income, write down all your recurring expenses (both fixed and variable), categorize your expenses, and prioritize saving for the future and paying down debt. Revisit your budget regularly to get to know your spending habits and make adjustments as needed. 

2. How can I live off my budget and still save money?

Saving money can be challenging on a tight budget, but even setting aside just 1% of your income can make a difference over time. Try gradually increasing that percentage so you can boost your savings without seeing too much of an impact on your daily expenses. 

3. How do I tackle debt on a budget?

Use the “pay yourself first” method to ensure you’re putting money toward your outstanding debts each month. Try also paying more than the minimum on your recurring debts, cutting out unnecessary expenses where you can, using budgeting apps, and revisiting your budget regularly to find and address key areas of overspending. 

1. LendingClub Bank receives compensation from Trim for referrals made through LendingClub.