Back to basics: How to build a budget and stick to it
July 6, 2023
5 min read
What we'll cover
5 steps to start budgeting
Benefits of tracking your finances
Ways to stick to your budget
If you’re not already budgeting or need some extra guidance, you can take a few simple actions today to get started. A monthly budget will help give you a clearer picture of how much money you have coming in and how much is going out. It’ll set guidelines for your expenses that will help you understand how much you can set aside for those bigger ticket items, like saving for a down payment or an emergency fund. And it provides the insight needed to highlight areas where you should tighten your belt.
Here are some suggestions for how to get started.
Step 1: Look at your paycheck.
To create a budget, you first need to know your net monthly income, or after-tax income. This is your monthly take-home pay, not your total salary — an important distinction when figuring out how much you can spend on a monthly basis. Knowing this number is the first step to creating a spending strategy.
Step 2: Distinguish your needs from your wants.
Now it’s time to make a list of your essential expenses. This involves separating your “wants” from the “needs.” Needs usually include things like:
• Housing costs (monthly rent or mortgage payment)
• Transportation costs (car payment, fuel, public transportation)
• Internet, cable, and phone bills
Once you’ve tallied those costs, add them up and deduct your needs total from your after-tax income. Make note of that number.
Step 3: Calculate how much your wants cost you.
Next, outline all the things you spent money on that don’t fall into the “needs” bucket, and tally up the total. You can look at your credit card statements from the last month or two as a starting point. If you use cash to pay for things, keep a log for several days (or better yet, a couple weeks) of all your expenses.
Once you have a clear picture of your costs, use a critical eye and note where you’re being your own worst enemy by overspending or wasting money on things you don’t need (or even want). Strategize on how you can modify your behavior to reduce these unnecessary expenses.
While it’s okay to splurge on occasion (we fully support treating yourself and your ship-in-a-bottle collection — or whatever floats your boat), it’s important to do so in moderation.
Step 4: Add up all your costs.
Jot down the total amounts of your “needs” and “wants” and see how they stack up against a common rule of thumb: the 50/30/20 budget. This popular money management plan says you should spend 50 percent of your take-home pay on needs, 30 percent on wants and put the remaining 20 percent toward savings and any debts you may have, like school loans or revolving credit card debt.
Don’t panic if your current financial picturedoesn’t align with this ideal ratio. It can be difficult to stick to this plan, especially if you’re new to the workforce and possibly paying down student loan debt.
But that’s exactly why a budget can be so useful. Matching up how much you spend to established guidelines can be a helpful way to identify where everything’s lining up — and where you can put in a little more effort and reduce your spending.
One easy way to track your expenses is to use spending buckets, a feature of Ally Bank’s Spending Account. You can create up to 30 buckets for different spend categories, then decide how much money should go in each bucket and how often.
If you map out your fixed expenses with spending buckets, you’ll be able to clearly see how much unbucketed money you have left over. You may decide to save the remaining amount or put it toward paying off debt.
Step 5: Keep it up.
Now that you have your budget created, here comes the harder part: sticking to it.
When it comes to minding your numbers, try out some of these tips:
Be a stickler.
While putting 20 percent of your take-home pay toward savings and debt isn’t technically considered a “need,” try to treat it as one. Avoid dipping into that bucket to pay for “wants,” so you can pay down debts and afford future unknowns, should something arise. In fact, you could remove temptation by setting up monthly automatic savings transfers.
Break it down.
If a monthly budget isn’t as manageable, try chopping it up into a weekly segment. A shorter time frame can make it easier to stay on track. That way, you won’t discover that you’re already pushing the limit of your budget with a week left in the month.
Log on regularly.
Along those same lines, keep track of your purchases as they happen instead of totaling them up at the end of the month. Regularly checking your balance online or reviewing your recent credit card charges is a great reality check for daily expenditures.
Use helpful tools.
If you’re an Ally Bank Spending Account customer, use the features of the account to your advantage. For example, you could create a spending bucket, name it “clothing” and set aside $100 every month. You can set up the bucket so that every time you shop at your favorite retailers, the money you spend is pulled from that clothing bucket. Doing this for each of your spending categories may help you control your spending on your “wants.”
Get everyone on board.
If other people (like your partner or roommate) are supposed to follow your budget, make sure they’re on board with the financial goals you’re trying to meet. Involve them in the planning and share the impact of their spending on the 50/30/20 model to avoid accidentally going off the budget rails.
Budgeting made easy
Budgeting doesn’t have to be the complicated or intimidating task that it’s often made out to be. Follow our simple guide, and your monthly budget will help keep your finances in check.