How to Make a Budget That Works for You

What are some key components of successful budgeting?

Any budget you choose should encourage you to track and organize your monthly income and expenses. This will help give you the power to control your finances so that you could achieve your personal goals.

You’ll also want to identify a financial goal. This could simply be to pay for your needs each month, such as your housing, food, car, insurance, or other fixed expenses. Or you may want to pay off debt faster. Depending on your financial situation, you might also include savings to create a financial cushion for emergencies or to afford discretionary spending on things like clothes, travel, or dining out.

How can you set a realistic goal for budgeting?

A realistic budget for you starts with tracking your income and expenses, defining measurable financial goals, and choosing the budgeting method that works for you.

You may be budgeting for a specific purpose, such as saving for a home or education. You might be creating an emergency fund or paying off debts. Your financial goal may simply be to create a financial plan, which can relieve financial anxiety.

For example, you make it a financial priority to save $1,000 over the course of a year. You could plan your budget for the next 12 months, identify how much to save each month, and track your progress. Or you may be saving to pay for a future event, such as a wedding or vacation. By knowing your time frame, you determine how much you might need to save each month to reach your goal. And, knowing how much you spend compared to how much you earn can show you whether that monthly savings amount is realistic today.

Only you can determine which milestones reflect your personal financial goals or current situation. Understanding what money comes in and what goes out each month will help you see where you might need to cut back spending, for example. Or it could help you see how much you are already saving.

What is the best way to start a budget?

Start by gathering and organizing your financial documents so you can create a picture of where your money comes from and where it goes. These include bank statements, pay stubs, and copies of bills. Knowing your total monthly income and essential expenses is crucial in order to build your budget wisely.

When you assess your monthly income, be sure include all sources. Beyond your salary note things like alimony, child support, or government payments. If your income fluctuates, from tips, gig work, or freelancing, be sure to keep track of those payments, too.

Next, list your expenses, including both fixed and variable costs. Start with essential expenses, such as housing, groceries, utilities, insurance, healthcare, and debt repayment. Don’t forget to list discretionary expenses such as streaming services, dining out, entertainment, luxury items, or vacations.

You’ll also want to include in your budget the amount you set aside in savings. Whether you choose each month how much to save or you’ve automated your savings into a separate account, building any size nest egg is a good idea.

How can you choose the right budgeting method?

The right budgeting method for you is the one you can stick to, review regularly, and feel comfortable with. You might choose a budget shaped by your financial goals, for example. If your aim is to build your savings, you could choose a method that focuses on savings. If your goal is to pay down your debt, you might want to include a debt-paying strategy into your budgeting plan, such as the snowball or avalanche method

To get started, here are five methods for budgeting that you may want to consider.

1. What is zero-based budgeting and how does it work?

Zero-based budgeting means that you fully allocate your income each month to address your upcoming expenses. Each expense should be considered carefully so that it will meet your needs and goals. In other words, rather than setting your budget based on what you’ve spent in the past, you decide if you want to spend more or less on a particular category in the next month.

For example, after setting aside money to pay for needs such as housing, food, and insurance, you might use your extra money to pay down a credit card balance. Or you might use the funds for clothing or for savings. This method provides flexibility, though generally 50% of your income is still used for needs and essentials. 

Example of a Zero-Based Budget

The zero-based budget method allocates all your income each month to your various spending categories.

2. What is the “pay yourself first” budgeting method?

The “pay yourself first” method prioritizes saving or investing. With this method, before paying expenses you first choose a specific portion of your income to save or put toward a specific financial goal. A typical percentage may be 10% or 20% of your monthly income that you place in savings.

For example, if you bring home $4,000 a month, you could immediately put $400 to $800 into a savings or investment account. To help make this easier, consider automating these savings through direct deposit so that a portion of your paycheck goes into that separate account.

3. What is proportional budgeting?

Several budgeting methods are based on ensuring that fixed percentages of your income are applied in specific ways. Proportional budgeting methods are generally fairly simple. Here are some common proportional budgeting methods.

The 50/30/20 method

The 50-30-20 rule divides your income into three categories. With this method, 50% of your income should address your needs, such as housing, utilities, healthcare, and transportation. After that, 30% will pay for your wants, like shopping, entertainment, or dining out. The final 20% is put toward your financial goals, like building your savings or paying off debt. This means if you had $4,000 in after-tax income each month, $2,000 would be used for your monthly needs. An additional $1,200 would be used for your wants. Finally, $800 would be placed into your savings or applied to your debts.

The 10/10/80 method

The 10/10/80 budget is similar to the 50/30/20 method, but it is designed to include contributions or charitable donations that are important to you. With this method, 10% of your income is set to go to charities or your favorite causes. Another 10% is placed in savings. The remaining 80% pays your other expenses, including both your needs and your wants.

The 80/20 budget

The 80/20 method is the simplest proportional budget method. In this scenario, 80% of your income is used to pay all your expenses. This includes necessary and discretionary expenses, as well as any debt repayment you might have. The remaining 20% of your income goes to savings, such as retirement or an emergency fund. While this method may be easier, it may not be the right choice for you if you want to plan your spending more precisely.

4. What is envelope budgeting?

The envelope budgeting method refers to a traditional approach of physically placing cash into envelopes that are labeled for specific purposes. You handle your fixed expenses—rent, car payments, insurance, phone, internet, etc.—with check, debit, or online bill pay. Your groceries, clothing, dining out, and assorted treats are then paid only with cash. It’s a useful method to bring discipline and control to your monthly spending. 

Even if you mostly shop online, this method can still work. It will take more discipline, but if you keep track of your payments, you can limit what you spend in each category throughout the month. It can also be used with other budgeting approaches, such as the 50/30/20 method, which would determine the amount that each envelope contains.

5. What is values-based budgeting? 

Values-based budgeting focuses on creating a financial plan that reflects your core values. For example, you may find that traveling is a priority for you, so you may choose to focus on saving money for trips. Or you might have a special cause that you want to support.

Recognizing your priorities is an important first step. You can then direct a specific portion of your income to benefit any effort or initiative that aligns with those personal values. Like the 10/10/80 budget method, you might set aside 10% of your income for a cause that is important to you.

How often should you create or review a budget?

If you don’t have a set budget, now is the best time to create one. Once you have a budget, how often you review it depends on your financial situation and goals. Some people like to true up their budget monthly. Others are comfortable with quarterly check-ins.  

If your financial circumstances change, you’ll want to update your budget to account for that. For instance, you might get a new job or have an unexpected expense. Revising your budget when your finances change can help you make new financial decisions about your spending and saving. It could also help you see how you can make more progress toward your financial goals.

Regularly reviewing your budget and the method you use helps ensure they are working to help you achieve your goals. No matter your approach, it’s important to complete an annual review and to create a new budget when needed.

And when you do review your budget, be frank with yourself about whether you’ve been meeting your goals. If you haven’t, you might explore ways to lower your expenses or increase your income. If you have been achieving them, take a moment to congratulate yourself. Then decide if you want to save more or tackle a different debt repayment.

How can you budget better if you have high-interest debt?

If you carry high-interest debt, creating a budget may feel like another hurdle. But using your budget to repay your debt could be just what you need to relieve your financial pressures. 

Maybe your debt is stressful because you make several payments at different interest rates, amounts, and dates each month. You could consider simplifying your debt repayment with a personal loan.

A personal loan can be used to consolidate your debts, which could simplify your budget because you are able to repay your debts with one set regular monthly payment. You might also be able to save money on interest over time.

In fact, our customers find a personal loan can help you pay off debt sooner and save money on interest when consolidating higher-rate debt. 81% of surveyed debt consolidators said they saved money and time by taking out a Discover® personal loan.*

By creating a realistic budget and choosing the budgeting method that fits your situation, you may be well on your way to setting a long-term plan to achieve your financial goals. It’s just one good money habit you can develop. Want more tips?