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Budget Breakthrough: How to Create, Manage, and Tweak This Elusive Tool

April 18th, 2017 · No Comments · Budgeting

by Staff

Budget Breakthrough: How to Create, Manage, and Tweak This Elusive ToolNo matter how many times you’ve tried and failed to follow a workable budget, it’s time to try again. Because no matter how many times you tell yourself you don’t need a budget, the truth is that you do. That’s not to say you need a detailed budget with dozens of categories (though that’s certainly an option). But you do need something that instructs your money on how to cover necessary expenses while meeting your financial goals. That something is called a budget. Here’s how to create, manage, and tweak this elusive (but necessary) tool.

How to create your budget

1) Make a list of your financial goals

What do you want to accomplish with your money, both short- and long-term? Sure, you know you need to be saving and paying off debt, but make a list of specifics. The order of your priorities might look something like this:

Some of these things you may already be doing. Others may not apply to you at all. And you may have others to add to the list.


When making your financial goals, don’t be discouraged by doubt as to how you’re going to be able to fund them. The point of this step is intention and empowerment – deciding what you want your money to do, not letting your money decide for you. Granted, you may not be able to contribute as much toward these goals as you’d like, but the value is in getting clear on exactly what you want and working toward it.

2) Add up your monthly take-home pay

If you’re on a fixed salary, this should be pretty straightforward. If your income varies from month-to-month, it’s obviously more challenging. The longer you’ve been earning this irregular income, the better idea you’ll have of what you should budget for by looking at least year’s earnings. If your work is seasonal, maybe it’s best to go by last year’s corresponding month. You could also use an average of last year’s monthly earnings or use the lowest-earning month as a baseline.


  • Remember to include additional income (e.g., alimony, child support, side hustles)
  • If taxes, insurance, and retirement aren’t taken out of your paychecks, remember to subtract them from your take-home pay

3) Add up what you spend every month, by category

Track your spending for 30 days. How many categories should you use? It depends on you. Some people like to break spending down into as many categories (and sub-categories) as possible, which might look something like this:

  • Housing
    • Mortgage/rent
    • Homeowner’s or renter’s insurance
    • Repairs (if you own)
  • Utilities
    • Electricity
    • Gas
    • Water/sewer
  • Cell phone
  • Internet
  • Food
    • Groceries
    • Eating out
  • Personal care
  • Clothes
  • Household expenses
  • Home office
  • Transportation
    • Car payment
    • Car insurance
    • Gas
    • Maintenance/repairs
  • Kids
    • Child care
    • Back-to-school expenses
    • Extracurricular activities
  • Pets
    • Food
    • Veterinary care
  • Entertainment
    • Movies
    • Cable/streaming services
    • Other
  • Gifts
  • Travel
  • Charitable giving
  • Holidays (holiday-specific food, gifts, travel, charitable giving)
  • Healthcare
    • Health insurance (if you pay for your own)
    • Out-of-pocket medical expenses (co-pays, vision/dental if not covered by insurance)
  • Life insurance
  • Miscellaneous
  • Debt payments
  • Savings
    • Emergency fund
    • 3-to-6 months living expenses
    • Special event or trip
    • Retirement
    • Kids’ college

For an even more comprehensive list of possibilities, take a look at Mint’s budgeting categories.

But if you prefer a simpler budgeting system, you could have far fewer categories. For example, if you go with the 50-20-30 percentage budget (more on that later), you may limit your categories to 1) essentials (50 percent of your take-home pay), 2) financial goals (20 percent of your take-home pay), and 3) discretionary spending (30 percent of your take-home pay.

NOTE: Obviously, you won’t have every possible expense every single month. For those categories for which you had no spending over the 30-day period you’re tracking, use last year’s spending in those categories to come up with a monthly average (if you don’t have the exact figures, estimate). You won’t spend that monthly allotment every month, but you can (and should) contribute that much to a fund for covering those expenses in the future. Good examples are spending on gifts, home and car repairs, back-to-school expenses, and medical expenses not covered by health insurance.

4) Subtract what you spend from what you earn

The goal, of course, is to spend less than you earn. If you discover that you’re spending more, you know you need to cut back. But even if you’re spending less, that’s not to say you’re spending right. The point of a budget is to make sure you’re spending in a way that not only ensures that all of your bills are paid, but that you’re funding financial goals that are important to you.

5) Adjust your spending accordingly

How much can you deduct from your spending to put toward your financial goals instead? Look at variable expenses, of course, like food, gas, and entertainment. But look at fixed expenses, too. Maybe you can:

  • Cancel cable and stream your programming through Netflix, Hulu, Amazon Prime, or Sling TV
  • Talk to your cell phone provider about getting on a cheaper plan
  • Shop around for cheaper car insurance
  • Share the cost of rent and utilities by renting out a room in your home

The point is to move as much of your income as possible away from spending so you can funnel it toward your financial goals.

How much should you be allotting to what? It’s up to you, but you might want to use one of these percentage budgets as a guideline:


  • 50 percent of your income goes to essentials
  • 20 percent of your income goes to financial goals
  • 30 percent of your income goes to discretionary spending


  • 60 percent of your income goes to essentials and non-essentials
  • 10 percent of your income goes to retirement savings
  • 10 percent of your income goes to long-term savings
  • 10 percent of your income goes to short-term savings
  • 10 percent of your income goes to fun spending

Goldilocks Budget

  • 35 percent of your income goes to housing
  • 15 percent of your income goes to transportation
  • 25 percent of your income goes to discretionary expenses
  • 10 percent of your income goes to savings
  • 15 percent of your income goes to paying off debt

Whichever allotment of spending you choose – be it one of these or your own variation – what’s most important is that you have a plan for your money so you know exactly where it goes.

6) Don’t leave a single dollar unaccounted for

However you decide to budget your money, make sure you budget all of it. This is known as zero-sum budgeting, meaning you’re left with zero because every dollar has been “spent” on expenses, debt, savings, or investments. Because if you’re not telling your money what to do, it’s not working for you. Learn more about zero-sum budgeting.

How to manage your budget

1) Use a budgeting app

Whether budgeting is new to you or you’ve been doing it for years, an app can help make it easier. The key is in choosing the right one. When looking around, ask yourself these two questions:

  • Is it free? There are too many free options for you to have to pay for one.
  • Does it connect to your financial accounts? If so, it will automatically log your activity on bank and credit card accounts. Keep in mind you’ll already have to manually input any cash transactions, so this is an important time-saving, user-friendly feature.

The best options that meet both of these criteria are Mint and LearnVest. If you don’t love either one of those, check out YNAB. It’s a paid app but offers a free trial. If you like it, pay $5 a month or $50 a year.

Apps not for you?

You may prefer managing your budget with personal finance software (like Quicken), Excel spreadsheets, or a budget binder.

2) Set up automated deductions from your checking account

The more you can do to automate your spending and saving, the easier it will be to stick to your budget. So if you haven’t already, utilize all of the automated options you have, including:

  • Automated transfers to savings. No matter how committed you are to a savings goal, you run the risk of falling short if every month you’re faced with the choice of saving or not. Take the decision out of it (or forgetting altogether) with automated savings. Only once do you have to pick a monthly savings amount, and the date you want it to come out of your checking account. If you already have a savings account attached to your checking, it’s simply a matter of adjusting the date and amount to meet your savings goal. Otherwise, talk to your bank about getting automated savings set up.
  • Automated payments. If your savings isn’t automated and you forget to make the transfer, the only person you have to answer to is yourself (and possibly your spouse). But if you forget to make a payment, you have a company to answer to, which will likely mean a late fee that unnecessarily sabotages the success of your budget. So for recurring bills, take advantage of automated payment options that you can set up either through the company or your bank.

3) Use the cash envelope system

This isn’t intended for all of your expenses; only the ones for which you can easily 1) go over your budget and 2) pay with cash. For instance, you wouldn’t use the cash envelope system for mortgage or rent payments, insurance payments, utilities, cell phone payments, or credit card payments. What you would use the cash envelope system for are things like groceries, eating out, gas, movies, and clothes.

As for the system itself, it’s just like it sounds. Whatever your budget for groceries this month, put that much cash in an envelope. When the money in the envelope is gone, you’re done buying groceries for the month. If that means getting creative with what’s in the pantry, so be it. Obviously, you have to eat, so if you run out of food and need to borrow from another envelope you can. But don’t make it a habit. Learn from the shortfall and budget differently going forward. (It might also help to divide your monthly cash allotment into weekly envelopes.)

What’s really driving your financial decisions? Find out.

Times When Your Budget Needs a TweakHow to tweak your budget

You’ll know it’s time for a change if:

  • You spend more than your budget allows
  • Your income changes
  • Your expenses change
  • Your financial goals change

Under any of these circumstances, go in and revise your budget accordingly:

  • If you’re falling short in a budget category or your expenses increase, cut that amount from one or more other categories; if you can’t find the money, look for ways to increase your income
  • If your income rises or your expenses decrease, reserve the extra money exclusively for funding your financial goals
  • If your income falls, go in and cut expenses by that much; if it means temporarily lowering your funding of financial goals, so be it
  • If you decide to pursue an additional financial goal, or increase the funding of an existing one, cut expenses from other categories or find extra income
  • If you decide to let go of a financial goal (like funding a trip or special event), reserve that money exclusively for funding other financial goals

Beyond that, make it a habit of revisiting your budget at least once a year. An expense you have today may seem unnecessary 12 months from now, especially if that extra money can go toward the financial goals that you’re getting closer to achieving with every passing week, month, and year.

Learn more about budgeting.