A budget is a plan for your money. Plain and simple! As a matter of fact, I like to call it custom organization for your money, because when you budget, you’re getting organized and taking control of the income you work hard, precious hours to earn. I also call budgeting self-care. Because it’s deciding that your self cares about where your money goes! Every single dollar!

I know this because I’ve lived it. My husband Sam and I paid off $460,000 in debt—and having a budget was key to helping us make that happen.

And that’s why I get so pumped to talk about this topic. So, let’s do this! We already answered, “What is a budget?” Now let’s break it down even more: from the types of budgets, to how to make a budget, to some classic budgeting myths that might be holding you back this very moment.

Let’s dive in.  

Types of Budgets

When it comes to ways to budget your money, you’ve got options: Excel spreadsheets, classic pen and paper, or budget apps (like EveryDollar—the app Sam and I use).

You’ve also got different budget methods to sort through, so here are four of the most popular ones out there:

1. 50/30/20 Rule

The 50/30/20 rule says 50% of your income goes to needs, 30% goes to wants, and 20% goes to savings. But hold up, I’ve got a couple problems here.

First off, if you’re staring down $460,000 of debt like I was, you shouldn’t be spending 30% of your income on extras. If anything, now is the time to cool out in that area.

Also, if you stop to do the math by subtracting average expenses from average income, the average American does not spend 50% on needs. Try 80%. Real talk, this budget method does not work. (Find that math and everything else about the 50/30/20 rule here.)

2. 60% Solution

Here’s another popular method based on budget percentages. With this one, 60% of your budget goes to anything you’ve “committed” to pay for (including wants and needs). You divide up the other 40% like this: 10% to retirement, 10% to long-term savings, 10% to short-term savings, and the last 10% to “fun.”

Okay, first up, I don’t want you lumping needs and wants in together. You better be covering groceries before your Netflix subscription. You have to eat. You don’t have to binge-watch The Crown.

But let’s not forget the average American is spending 80% on needs alone—which includes minimum payments on several kinds of debt, by the way. That’s right. This 60% solution doesn’t hold up, especially if you’ve got debt. And it’s got no plan of attack for getting you out of debt. Thank you, next.

3. Set It and Forget It

Let’s say you write up your first budget, but then you just leave it there all month long. You don’t check in. You don’t track spending. That means you created the plan, but you didn’t follow up or follow through! So, what was all that work for?

Using the “set it and forget it” method for budgeting is like writing out the steps to train for a marathon and then never even lacing up your shoes. Making the plan is just the first step—not the whole enchilada. (Don’t worry. We’ll walk through all the steps in just a minute.)

But take it from me—this one won’t work either.

4. Reverse Budgeting

This method starts with savings and then tackles spending. (Perfect name, right?) It says you should start your budget by saving for emergencies, other goals (like a home or travel), and retirement. After that, you budget for essential expenses like housing, utilities, transportation, food, insurance and debt. Finally, you cover nonessentials and fun.

Start budgeting with EveryDollar today!

Hey, I’m all about savings being a priority. But I don’t want you putting all these savings goals first if you’ve got debt. (And 77% of Americans—aka most of them—have debt!)¹

Build a starter emergency fund, then pay off your nonmortgage debt before you load up your savings and start investing for retirement. Your income is your largest wealth-building tool. When you’re debt-free, you can use that tool to prep for the future, rather than paying off your past.

5. Zero-Based Budgeting

A zero-based budget is when all your income minus all your expenses equals zero. This doesn’t mean you have zero dollars in your bank account. (Leave a little buffer in there of $100–300.) It does mean you’re giving every single dollar a job. All right, now we’re getting somewhere!

I love a zero-based budget because it doesn’t confine your money—it defines your money. It’s you defining how much money you’ll put toward debt and savings each month. It’s you saying what you’ll spend on giving and groceries, on rent and restaurants. A zero-based budget puts you in control of your money. All. Of. It.

And that’s why it’s my favorite—and the best—budget method.

How to Make a Zero-Based Budget

Now it’s time for those budgeting steps I just mentioned:

1. List your income.

Write out every regular paycheck coming in this month for you and your spouse, if you’re married. And don’t forget anything extra. (I see you, side hustlers! And I’m cheering you on.)

Then add it all up to see exactly how much money you have to work with. But wait, if you’re like me and hate math, try a budgeting app like EveryDollar. It does all the math for you.

2. List your expenses.

List anything you might possibly spend money on—all the giving, saving and spending happening this month. And when it comes to spending, make sure you cover your Four Walls (food, utilities, shelter and transportation) first. Then other essentials. Then the fun stuff. That’s right: Needs come before wants. Every. Time.

And when I say anything, I mean it! From fixed expenses, like rent and car payments, to variables expenses, like groceries and  grandma’s birthday cookout—plan for it all!

3. Subtract expenses from income.

Remember, this should equal zero (aka that zero-based budget we just talked about). If you’ve got anything extra, put it toward your current money goal. If you’ve got a negative number, don’t freak out.  Here are a few ways to get it to zero.

Short Term:

• Cut some spending. (To Hulu or to Netflix—that is the question.)
• Pick up a side hustle to make more cash.
• Downsize your lifestyle. (Those car payments, am I right?)

Long Term:

• Start looking into higher paying job options.
• Research lower cost areas to live.

 

4. Track your transactions (all month long).

Okay, you did it. You wrote out the plan. Now, it’s time to fully understand the assignment and stick with it.

How? By tracking your transactions! Despite what you saw on Instagram, don’t wait till the end of the month to see what you spend—you should be tracking that all month long.

That’s right: When you make money, track it to income. When you spend money, track it to the right budget line. This is how you’ll stay on top of your spending—so you don’t overspend.

And again, if this seems like a lot of work, it’s not—with EveryDollar! You can connect your bank so the transactions stream right into your budget. All you have to do is drag and drop them to the correct line. It’s kind of like a game. It’s actually oddly satisfying.

Anyway. The point is—track your transactions!

5. Make a new budget (before the month begins).

Your budget needs to be detailed, realistic and flexible. And making a new budget each month will help you do just that!

Get detailed by covering all those month-specific expenses, like holidays or celebrations.

Make it realistic by planning fair amounts for each category.  Prices have changed. Your budget needs to reflect that. If you aren’t realistic, your budget will be impossible to stick to, and you’ll eventually fall off. So, be realistic when you make the next month’s budget, adjusting your planned amounts as you learn what works for your income, your goals and your life!

Finally, be flexible! The truth is, sometimes things pop up that end up being more expensive, like the utility bill or your babysitter.  Understand you may have to adjust other categories to rebalance your budget, and that’s okay. Just be sure not to pull from necessary areas like rent or savings to make it work.

To help with this, make it a practice to look back over the previous month to see if you need to make adjustments based on any overspending (or underspending!) you did.

This is your budget. It should reflect your goals and your life. Follow these five steps, and you’ll crush it.

If you need a starting point, check out our budget calculator.

Why Budgeting Is So Important

You work too hard to just wonder where your money goes every single month. That’s life without a budget. Your paycheck comes in and—lickety-split—it’s gone. But you don’t have to live like that!

If you’ve tried budgeting before and gave up, try again. If you’ve never given it a go—it’s time! Download EveryDollar (remember it’s free!) and start budgeting!

Then give yourself three months to get the hang of it, because nobody starts off with a perfect budget. But the work is worth it. You’re about to be calling the shots with your money. And there is nothing in the world like that feeling.