I’ve had a lot of people asking me about budgeting recently: How I do it. What tools I use. How to get started.

My Personal Budgeting History

Honestly, I’ve kept a budget ever since I moved out of my parents’ home at the age of 18.

I was living in an apartment with my best friend, and I had literally no income at all. I remember getting $40 somehow and marking each $20 bill with a different category.

One bill said “Food.” Another said “Gas.” I taped the “food” bill to the wall of my bedroom, hoping that would help me save it a while longer.

Then one day I got hungry and took that $20 bill to a fast food restaurant for a cheap combo meal. The worker gave me a sideways look when she saw “FOOD” written in large black Sharpie across the front.

Since then, my budgeting methods have improved a bit. I am still not great at sticking to my food budget, but my system gets better every day.

My Budgeting Qualifications

I also have an accounting degree and have about a decade’s worth of experience working for various businesses, so I guess I have some credentials at this point.

Mainly, though, it’s a love for organization and stress-free living that makes me stick to a budget. I hate that sick feeling in the pit of my stomach when I spend $200 at Target and have no idea what my bank balance is at the moment. I much prefer spending $200 when I know I have $200 to spend, thankyouverymuch. So I budget. This is probably way more than you ever wanted to know about finances, but here we go.

Why do you need a budget?

You’ve probably already heard all the common sense advice regarding budgets. Somehow, budgeting has become synonymous with a nerdy lifestyle. (I don’t really help this stereotype.) Some people even think budgeting restricts them somehow. “Sorry, I can’t. I’m on a budget.”

I get it. It’s not fun to put an item back on the shelf because you don’t have room in your budget. It’s embarrassing to tell your friends you can’t go to dinner because you’ve spent all of your “fun” money for the week. But do you want the honest truth? If your budget feels restrictive, it’s for one of a few reasons:

1. You may not have enough income.

Now, obviously this is upsetting news. But you probably already know you don’t make enough money if that’s the case. In this situation, budgeting is especially important because you need to make the dollars you do have work the best they can. If you’re broke without a budget, your money tends to just disappear with nothing to show for it. If you’re broke with a budget, though, you can make some headway and at least explain the situation to bill collectors. The power company is much more understanding when you call and say, “I know I can pay you on the 15th because I have a budget.” If you wait till your lights are shut off and then call…well, they’re gonna be less willing to work with you.

You will also know how much money you need to make. There are options with a budget. You can pick up a second job, sell some stuff, or look for a new job. It’s much easier to do these things when you know how much money you need each month to survive.

{Side note: If you are struggling to make ends meet, see my Variable Income Planning post. It has a lot of good advice when you’re broke.}

2. You may spend more than you should.

This is probably the one a lot of you are afraid to hear. You don’t want a budget because deep down you know you have a spending problem, and you don’t want to face that fact. So you’d rather just feel a bit guilty every time you plop down your credit card, then put the thought back out of your mind. Oftentimes, this results in a victim mentality when the bills are due. You think to yourself, “Why do I never have any money? Why does everything bad happen to me?” But the truth is that bad things don’t happen to you. You make bad decisions and have to face the consequences. It sucks, and it sounds harsh, but it’s the reality of the situation.

3. You may not be budgeting enough.

Sometimes, the problem is neither of the above. Instead, you’re just not budgeting enough money in your categories. It’s an easy problem to fix, and you can quickly address the situation after just a month of budgeting. If you feel like you spent reasonably that pay period and still went over your budget, you probably need to increase the amount just a bit. We will go over that a bit more later.

You also need a budget for all the obvious reasons. By deciding where you want to spend money, you’re also deciding how to save money and making steps towards your long-term financial goals.

Budgeting Gives You Peace of Mind

For me, though, the best part of budgeting is peace of mind. I like knowing that what I’m doing is okay and won’t cause any problems later. If I decide to pick up a $15 tee shirt at Target, I’d rather not worry that it’s a bad decision. With a budget, I know if I have $15 in my clothing budget or shopping budget or whatever. It completely changes the way I spend. I’ve become much more mindful of everything I do, which is never a bad thing.

How do you start budgeting?

Budgeting can be as simple or as complex as you want it to be. You can literally just take a napkin and jot down your account balance right now. List the bills you have due at the moment, the amount you need for food, groceries, and other important items, and voila! You have a budget.

The Best Budgeting Forms

Taking it a step further, you can download a simple budgeting form. I like to use Dave Ramsey’s  Monthly Cash Flow Plan because it’s super easy to use and it has recommended percentages for each category. (We will talk more about that later.)

I go back to the Allocated Spending Plan every now and then when I feel like I need a refresher course, but I usually use my own budgeting spreadsheet. [You can find it here. To make changes and input your info, click File>Make a Copy.] I created this a few years ago, and I just update it every now and then. It’s based on Dave’s Monthly Spending Plan, so the two work well together.

Programs like Mint and You Need a Budget let you set up a budget directly in the app or website. I find that I don’t use these budgets as well because they’re not as hands-on as pen and paper or spreadsheets, but you may prefer this format.

There are lots of other spreadsheets and budgeting resources you can find online. You can even make your own (like me) if you’re feeling ambitious. I recommend starting with something simple so you don’t feel overwhelmed. You can always modify your budget later if you would like something more detailed.

For now, try not to get bogged down in researching all the different budgets, though. Just pick a simple format and get started.

What categories should you use for your budget?

Now that you have a form, you may be wondering which categories to include in your budget.

This is totally up to you. There are many different types of budgets, and you can choose whichever one you want. I recommend starting with a pretty simple budget and moving to a more detailed one later. Here are the ones I recommend most:

The 50/30/20 Budget

The 50/30/20 budget is probably the easiest budget you will ever find. The steps are as follows:

1. Take your net income. This is the amount you actually bring home from your paycheck.
2. Split your net income in half. This is the 50% you should use for necessary expenses (or needs), like rent, food, gas, medical expenses, etc. It does not include discretionary expenses like Netflix and Starbucks.
3. Of the remaining half, 30% should be used for discretionary expenses (or wants). This includes stuff like dining out, vacations, Netflix, Starbucks, and Target shopping binges.
4. The remaining 20% should be saved in various accounts, such as retirement or an emergency fund. If you’re carrying student loans or credit card debt, you can use the 20% to pay these down before you start saving.

The Basic Line Item Budget

A basic line item budget has everything grouped into broad categories. These categories may vary from one person to the next, depending on your needs and wants, but examples include:

• Mortgage/Rent
• Utilities (Electricity, Water, Phone, etc.)
• Food (Groceries and Dining Out)
• Clothing
• Childcare
• Household (Maintenance, Repairs, Furniture, etc.)
• Fun and Entertainment
• Insurance (Auto, Home, Health, etc.)
• Medical
•  

Ideally, you would only have 10 categories (or less) with this budget. It’s not very detailed, but it’s extremely workable.

The Zero-Based Budget

Dave Ramsey advocates the Zero-Based Budget. With this format, you include categories for absolutely everything, and you make sure every single dollar in your account is allocated to one of the categories.

While I love Dave Ramsey’s budget format, I’m gonna be honest here: I don’t do a zero-based budget. Why? Because something always comes up, and I like having a little bit of money to use for those unexpected expenses.

For example, I was told last week that my child is moving to a new class in daycare, and I’m expected to pay the $35 book fee this week. Because I make my budget every two weeks, the timing was bad for this particular expense. Thankfully, I have a bit of extra money leftover, so I moved $35 to the category I use for my son’s childcare expenses. Easy peasy.

If you want to see all of the categories used for Dave’s Zero-Based budget, you can refer to his Allocated Spending Plan. I use a slightly modified version for my own spreadsheet, as well.

How much should you budget for groceries, bills, clothing, etc.?

Once you have your categories, you need to put an amount next to each item. This is the hard part that normally makes people give up on a budget. Let me warn you: It’s not that hard to put an amount down for each category. The hard part is sticking to the budget. You can always, always, always make adjustments later. If your budget doesn’t change a little bit each pay period then you’re probably doing something wrong.

Deciding how much to budget can definitely feel intimidating at first, though. Here are a few ways to handle it:

Look at Your Past Spending Habits

If you have a credit card or bank statement, look at how much you’ve spent for the past 1-3 months. You can quickly add up all your grocery and fast food charges to determine your food budget, for example. This should give you a rough estimate of your starting budget.

Don’t Set Unrealistic Goals

If the number is much higher than you’d like, please don’t be tempted to set an unrealistic budget for yourself. If you normally spend $1000 on groceries each month, you can’t possibly cut that back to $400 in your first month of budgeting. I recommend reducing by 10% the first month, then cutting an additional 10% until your hit your target each month thereafter. So, with this example, you would budget $900 for your first month. If you hit that target, budget $810 the next budget, and so on until you hit your $400 goal (or hit a plateau and realize that $400 is unrealistic for your family).

You can do this for each of your categories. Past spending data is obviously the most reliable way to start your budget. However, if you don’t have time to crunch the numbers, you can move on to my second method.

Use Recommended Percentages

Dave’s Monthly Cash Flow Plan includes recommended percentages next to each category group so you can tell if you’re on track or not. So, for example, Dave states that food should be between 5 and 15% of your net income. So, if you make $4000 per month, your food costs should be no more than $600. If your income is very high or very low, you may fall outside of his recommended parameters, but they’re good guidelines to follow, and he includes them for each category. If that’s still a bit too much for you, move on to the third way to choose your budgeting numbers.

Wing It

You may not find this recommendation anywhere else, but if all of the above seems like too much for you right now and you’re a little overwhelmed, just wing it. After all, you’ve gotta start somewhere.

If you think you can stick to $100 food budget and need $500 for clothes, that’s your prerogative. Put it down on paper and see if it works for you. You can read all the recommendations in the world, but it’s your money. You’re the one who chooses how you spend it.

How can you keep track of your budget?

Now, obviously you can’t keep all these numbers in your head, so you will need some way to keep track of your spending to make sure you stay within your budget. There are lots of ways to do this, too. I’ve probably used them all. Here are my favorites:

Mvelopes

I personally use an app called Mvelopes on my phone to keep track of my budgets. It’s based on Dave Ramsey’s envelope principle, which states that you stick to a cash-only budget and keep individual envelopes for each of your categories to make sure you don’t overspend.

I tried using actual envelopes, but I got sick of carrying cash around (it made me nervous), and I could never tell exactly how much cash I had left in an envelope. It just didn’t work very well for me. Mvelopes takes that same mentality, though, and makes it much easier for me to use.

Sync Mvelopes With Your Accounts

You set up the app to sync with your bank account, credit card account, or whatever you use to spend money. You can even add a cash account if you want. Then you allocate your balance to the various envelopes (or categories) in the app. You can edit or add envelopes so they match your budget categories perfectly. Then, whenever you make a purchase or pay a bill, just enter the transaction in the app and choose the corresponding category. You can split transactions, too, making them pull from more than one envelope (or category).

You Don’t Need a Separate Check Register

If you keep Mvelopes updated, then you won’t need a separate checkbook register because it keeps track of your account balances for you. Until transactions clear your bank account, they show up as “pending.” Once they’ve cleared, you can match the final transactions with the pending transactions to make sure everything is good to go.

I pay $3.99 per month plus tax ($4.39 total) to use Mvelopes, and it’s by far my favorite way to keep up with my budget. My husband also has the app on his phone, and because we use the same login information, all of his transactions automatically sync to my phone (I have an iPhone and he has an Android, in case you’re curious). There’s also a website you can use that has a few more features. They offer a free trial month if you’d like to check it out.

Mint

In the past, I used Mint to keep track of my budget. Much like Mvelopes, you can set up your budget categories and amounts to make sure you don’t overspend and see how much you have remaining in each category.

The main issue I had using Mint is that it’s better for recordkeeping than it is for budgeting. If you want to see how much you’ve spent in a particular category for the month, Mint is great. But the budgeting aspect isn’t integrated the same way it is with Mvelopes (because Mint doesn’t use the “envelope system” at all). So if you want to see your budget, it’s almost an afterthought. Too many times, I spent money I didn’t have to spend, then found that I’d gone over my budget. They eventually added a way to input pending transactions, but it just wasn’t as smoothless or simple as using Mvelopes. Still, it’s a good alternative, and it was free last time I checked.

Envelopes

When I first started budgeting, I used the envelope system. (Even my original college budget was a sort of variation of this system.)

I went to the bank each payday, took out the cash I needed to fund my envelopes, and wrote the balance on the outside of the envelope. I kept everything neatly organized in my wallet.

Why I Don’t Like the Cash Envelope System

It worked okay, and I used this system for a few years. Here’s what I didn’t like about it, though:

Losing cash.

I was always scared I was going to lose an envelope, and some had as much as a few hundred dollars in them.

FORGETTING AN ENVELOPE.

My husband and I share a budget, and there were too many times when one of us needed an envelope that the other one had in his or her pocket.

DIFFICULT TO MAKE ADJUSTMENTS

It was too hard to make adjustments. I tried to keep the cash balance updated on the outside of the envelope, but it got messy pretty quickly. I never knew where to put change, so I tried to just keep paper bills in the envelope and round to the nearest dollar. But there was a lot of crossing out amounts and scribbles, and it got tiresome.

CHECKOUT

Checkout was a nightmare. Whenever I wanted to pay for something as simple as groceries, checkout could be awful. Cash is just cumbersome, and all those envelopes are hard to manage. If I was at Walmart or Target, I’d often be buying items for several categories at once. There was no way I was going to ring everything up separately or pull cash from multiple envelopes, so I ended up doing way too much math in the car and switching cash from one envelope to the next. It was just exhausting.

SOME PEOPLE DON’T TAKE CASH

The world isn’t set up for cash. Some bills are hard to pay with cash, and some are almost impossible. You can use bill payment services at Walmart to pay most bills, but they charge a fee. It just wasn’t realistic. I normally paid my bills directly from my account and took cash for my spending categories, but it was still an issue when I wanted to order something from Amazon and needed to use my debit card.

Making Adjustments to Your Budget

Now, after a month (or maybe even a week) of budgeting, you will notice that your budget needs a little tweaking. You might have budgeted too much for one category and not enough for another. (I usually have to move money from groceries to dining out. It is what it is.)

A Budget Should Be Flexible

Please don’t feel like your budget is finite. You can make these adjustments whenever you need to make them, as long as you have the funds. If you feel like you need more fun money, go ahead and give yourself more fun money. The only person to hold you accountable is yourself (and your spouse or budgeting partner).

You Will Need to Make Changes

You can and will need to make changes on occasion. I’ve been budgeting for 16 years, and I still make adjustments pretty much every paycheck. Your budget is a living document, meaning it will need to be amended from time to time, and that’s okay. In fact, that’s a huge sign that it’s working and you’re doing well with it! It’s only an issue if you spend money and don’t change your budget to reflect what you spent. In that case, you’re not actually using a budget. Still, if you find yourself in that situation, don’t give up! Just make the adjustments or start fresh with a new budget.

Setting Long-Term Financial Goals

Now that you’ve got a budget, you can start focusing on your long-term financial goals – you know, the ones you’ve always considered “some day.” This is where it gets fun! You can take a little time to sit down with your significant other and plan your future together. What would it look like? Do you want a home? A new car? New furniture? A vacation? College funds for the kids? Or maybe you want the kids first? Whatever it is, you can make a plan now that you have a budget! To work these goals into your budget, I recommend keeping a separate savings account. If your goals are small-ish ($2000 or less), you can lump everything into one account and just keep track with a spreadsheet or list.

Use Separate Accounts for Big Goals

For bigger goals like a home or new car, I recommend keeping separate savings accounts so things don’t get too confusing and you’re not tempted to spend the money you’re saving on something else.

And before you start saving for anything fun, you should definitely put aside $1000 for unexpected expenses. Dave Ramsey calls this an “emergency fund.”

How to Keep Track of Your Bills

Now that you have all your goals and budget set up, you may be wondering about smaller things, like keeping track of your bills.

Bill Tracking System

Here’s the system I use:

1. When a bill arrives, I file it. If it’s a paper bill, I file it in my planner in a little folder I keep for bills. If it comes via email, I file it in my “Finances” folder in my email storage.
2. I keep a page for bills each quarter in my planner. Once I know the bill amount, I write it down. I also keep track of due dates. When I’ve paid the bill, it gets marked off the list.
3. When a new bill comes in, I file the old paper bill away. Oftentimes, I just throw it away. If I think it may be important later, though, I’ll keep it for taxes or whatever.

Should you use automatic bill payments?

I recently switched to automatic bill payments for certain bills. There are pros and cons to using this method.

Pros

• You don’t need to worry about forgetting a bill.
• It saves you a bit of time because you don’t have to manually pay each bill.

Cons

• If you’re living paycheck to paycheck, an automatic bill payment can overdraw your account.
• Sometimes errors happen. If a duplicate payment is processed or the amount is incorrect, it can be a nightmare to fix and get your money back.

Because of the cons listed above, I only recommend automatic payments if you have a credit card with a large credit line and you can pay it off each month. I would never want large automatic payments to hit my regular checking account each month because there’s always a possibility for error. If a paycheck doesn’t post on time or a bill posts too early, your account is overdrawn and you’re charged a huge fee. It’s just not worth the risk.

Use Credit Cards for Automatic Payments

Because a credit card works differently than a debit card, though, automatic payments are much safer that way. If there’s an issue, just contact the credit card company. It’s not cash money you’re worrying about, so you’ll still have your checking account until the issue is resolved.

Should you keep your home and business expenses separate?

The answer here is a resounding “yes!” It’s just too confusing otherwise. For tax purposes alone, you should always keep your business expenses separate from your household expenses. I personally use a separate account for my business, and it links to my personal checking account. I pay business expenses out of my business account, then I transfer any leftover income to my personal account. It’s simple and efficient, and I highly recommend it. I also have a business budget that is completely separate from my household budget.

Common Budget Problems

There are several budgeting problems that are asked often, so I’ll address those here. I may seem blunt because I think budgeting is one of those things people make more complicated than it needs to be.

Q: How do I choose a budget system? There are so many!

A: Just pick one! Seriously. You can always change your mind later if it doesn’t work for you. If you absolutely can’t decide, I’ll pick for you. Start with Dave Ramsey’s Monthly Spending Plan. It’s simple and effective.

Q: I don’t have enough money for a budget. How can I make this work?

A: That doesn’t make any sense. The less you make, the more you need a budget. The truth is usually that you don’t want a budget because you know you should be using your money for needs instead of wants. That’s your choice, but you should own up to it.

Q: I’m not good with numbers. Am I too stupid to budget?

A: No, and please don’t call yourself stupid. Calculators were made for a reason. Use one.

Q: This seems like a lot of information. Can I get a tl;dr version?

A: Sure. Here you go:

1. Write down the following:
   • Income/Bank balance
   • Food
   • Gas
   • Bills
   • Fun
   • Savings
2. Put amounts that seem appropriate next to each item. (Hint: Your income/bank balance should be on your paystub or bank account register.)
3. Voila! You have a budget. Don’t spend more money than you have.

Q: My income changes each month, and I never know how much it will be. How do I handle that situation?

A: I feel ya. I’m self-employed, so my income is all over the place. I use Dave’s Irregular Spending Plan to prioritize. I also try to keep a bit of a buffer in my business account to make up for those months where income is scarce.

Q: How can I fix my budget if there’s not enough money?

A: There’s no easy way. You either need to reduce your expenses or make more money. If that’s not possible right this second, you can prioritize your expenses to make sure the most important items get paid. In the meantime, work on increasing your income or reducing future expenses. You can use Dave’s Irregular Spending Plan for this, too.

Conclusion

I hope this guide was helpful and doesn’t seem too harsh. Honestly, finances are a struggle for everyone, but having a victim mentality doesn’t help. You can manage your finances if you try, even if it seems like everything is awful and the bills will never get paid.

With a budget, you will quickly know your current situation. Maybe it’s better than you think. Or, maybe it’s rough, but you can quickly brainstorm some ways to make it better. Maybe you’re headed for bankruptcy. No matter what, it’s better to know your situation so you can take control of it. Sticking your head in the sand is not a good way to handle your money. (All the experts agree on that point.)

If you have any more questions about budgeting, please let me know! I will be happy to help any way I can.

For a fluctuating income, see my Variable Income budgeting post.