A budget is telling your money where to go instead of wondering where it went.

-Dave Ramsey

Ah, budgeting. One of the most difficult and misunderstood concepts in all of personal finance. Making a budget is easy, but sticking to it is the hard part. Fortunately for you, there are plenty of resources out there (this blog included) to help you set and keep a budget. A sound budget is half the battle of developing good personal finance habits.

Now, budgeting gets a lot of flak because people automatically associate it with depriving yourself. On the contrary. Budgets are here to ensure that you have money to spend on the things that you want, and avoid going in the red financially.

When I budget, I budget to the penny. And why not? You should be aware of every dollar that enters and leaves your possession.

When you know exactly how much money you have, and exactly how much you expect to spend, then nothing will fly under the radar and catch you by surprise. Of course emergencies and unexpected expenses happen, it’s just a part of life. But that’s what an emergency savings fund is for. Let’s lay out the steps for setting and keeping a budget.

1. Write down your expenses

This is the first step to making a good budget. Make sure to write down every expense. This includes irregular expenses and once-a-year expenses. So that annual Amazon Prime membership? Put that down.

Start with fixed expenses, such as your monthly rent/mortgage, utilities, phone and internet, cable, car insurance, etc. A simple spreadsheet will do. List each expense, and how much it costs, as well as its due date.

Next, list your variable expenses. This one might be a little harder, since these costs are subject to change month to month. These include things such as food, gas, entertainment expenses, dining out, and things of the like. Be as specific as possible. Instead of listing “food,” instead list “groceries” and “dining out.” This way you can see exactly how much you’re spending on each category.

2. Include health insurance costs

Health insurance is important and should be included in your budget. If you have health insurance taken out pretax, then you can ignore this. However, if you have something such as an HSA or an insurance plan that is not sponsored by your employer, don’t forget to add a line item for it.

3. Write down your income, and how often you get paid

This part is pretty easy. If you’re salaried, then you can expect to get paid the same amount each pay period. Do not include bonuses. Bonuses should not be considered regular income, and should not be a part of your budget.

Instead, put bonuses in a special category to be dealt with later.
Your income will be compared to your expenses so you can know how much comes in and how much goes out each pay period, as well as how much is left over.

4. Track your fixed expenses

Now that you have all of your monthly expenses and your income written down, break your fixed expenses down into sections by date. This is a little easier if you get paid on the same date(s) each month, such as on the 1st and the 15th, but is a little tricker for those of us who get paid on a different date each month.

Personally, I get paid weekly, so I divide my expenses by 4, and place each expense into one of 4 subsections based on due date. For example, rent is due on the 1st of every month, so it falls into section 1. My cell phone bill is due on the 27th, so that falls into section 4, and so on for every expense.

Then I use whichever paycheck falls in the section before the expense’s due date to pay for that expense. So I use paycheck 4 to pay for rent and everything that falls in section 1 (the 1st of the month until the 8th). And I use my 3rd paycheck of the month to pay for my cell phone bill and everything that is due in section 4 (the 22nd until the end of the month).

Of course, this will vary depending on how often you get paid. Divide into halves if you get paid bi-weekly. Also, it is nice for months where you get an extra paycheck, as it can be considered “extra” pay since everything has been budgeted with the previous checks.

5. Track your variable expenses

So our fixed expenses are accounted for each month. It’s now time to budget for the variable expenses. This includes purchases that change from month to month, such as food and gas. This is where tracking spending comes into play.

There are many budgeting apps out there that can help you to track your spending. Mint is a popular, free option. They also have a handy Bills section that helps you to keep track of your monthly bills, as well as due dates. You can even pay some of them directly through the app!

Another option is You Need A Budget (YNAB). It’s a personal favorite of mine, and I have been using it for over a year now. It’s free for 34 days, after which it’s $5/month. And believe me, with the money that YNAB will help you save each month, that $5 is definitely worth it.

With one of these budgeting apps (or your trusty Excel spreadsheet), start keeping track of how much you spend on variable expenses. Record each transaction manually. It may seem like a pain at first, but it will prove to be extremely valuable for developing the mindset of taking charge of your spending.

This helps you to truly become aware how much you’re spending at lunch with your coworkers every day, or how much Starbucks is costing you each morning. In the beginning, I once realized I spent upwards of $500 on dining out alone! Once you see those numbers, you will start to see where you can cut back.

6. Set clear, attainable goals

So now you know where your money is going each month. Let’s say you’re spending $300/month on restaurants. Set yourself a goal to reduce those expenses by say, 25% per month. Or maybe you want to spend no more than $200/month on restaurants. What’s important is that you set realistic goals in the beginning, and work your way down to your target.

If you love to eat out every day, don’t expect to completely cut restaurants out of your budget within a month. Take a few months and see what your tolerance is. Maybe you can only get it down to $100/month and no lower. If that’s your threshold, that’s ok. It’s called personal finance for a reason. It’s about you and your money.

Personal finance is about being disciplined and spending money carefully and thoughtfully. It’s not about not spending money at all. This principle can be applied to any and every category. Which leads us to…

7. Start cutting out expenses where possible

When you’re comfortable tracking your expenses, start looking for places where you can cut back. Maybe you don’t need that expensive cable package. Netflix and Hulu are cheap alternatives. Maybe you’re paying for Super Duper Lightning Fast High Speed Internet when the regular internet package is enough for your needs for half the price. With a healthy budget, you’ll quickly see areas where you can start saving some money each month.

8. Stick with it!

And there you have it! You’ve successfully created a budget! Now it’s time to stick with it, and be disciplined. Also remember, budgets are flexible. If you’re being restrictive in one category, allot a little more money to that category. Just be sure to take it from another category. Good luck!