How to Make a Budget—and Actually Stick to It

Living by a budget can change your life. No more stressing about what you can or can't afford, what you should or shouldn't be spending, and your future.

Learning how to budget is one thing, but sticking to it is another. Why is it so hard to stick to a budget? Because it takes willpower, which we only have so much of. Willpower is like a muscle: it gets worn out after overuse.

We'll go over not only how to make a personal budget, but also how to stick to it using psychological hacks for long-term financial success.

What is a Budget?

A personal budget is a plan on how to spend your money over a certain time period. For most people, making a monthly budget makes the most sense. Since many of our bills are monthly, like rent and utilities, it's easiest to work with a monthly budget.

But, some people prefer to work with budgets that match their bi-monthly pay periods. Others prefer to budget on a weekly budget to more closely rein in their spending.

The following steps will assume you're making a monthly budget but can be easily adapted to work with any time frame.

It's easiest to think of your budget as having three parts:

• Basic living expenses
• Savings and extra debt payments
• Free spending

Basic living expenses are things you have to pay for each month, savings and extra debt payments will have your future self thanking you, and free-spending is for whatever you want. By chunking your budget into these broader categories, it's easier than micromanaging each item in your budget.

How to Make a Budget in 3 Easy Steps

Take out a pen and paper or pull up a blank spreadsheet, and make sure you have access to your bank account. There will be an example at the end so that you check your budget when you're done.

Step 1: Figure Out Your Monthly Take-Home Pay

When making a personal budget, the first thing you need to do is figure out how much income you're working with each month. You want to make sure you're not including any money in your budget that never makes it into your hands. For instance, taxes are taken out of your paycheck. If you have a 401k and healthcare set up with your employer, part of your paycheck may be going to those too.

You can figure out your take-home pay by looking at your paycheck. To make sure, look at past deposits of your paycheck in your bank account. Write down your monthly take-home pay at the top of your paper like so:

Take-Home Pay: $AA,AAA.00

Step 2: Subtract Your Basic Living Expenses From Your Take-Home Pay

For your budget, you’re going to have two columns. The left column will have line items for each thing you’re budgeting. The right column will have the maximum amount you’ll spend on that item each month.

Start your budget by working your way from essentials to non-essentials. Write down all of your basic living expenses and any debt you owe in the left column. In other words, write down everything that you have to pay for every month. Some things to include in this part of your budget may be:

Basic Living Expenses:

• Rent/mortgage
• Utilities (trash, water, electricity)
• Transportation (car and gas, bus pass, bicycle maintenance)
• Minimum student loan payments (student, auto, personal)
• Groceries
• Phone bill

Save any non-essential bills, such as gym membership or your Netflix or Hulu accounts, for Step 3.

For some things on your list, the cost will be fixed, meaning you spend the same amount on it each month. For instance, you likely spend the same amount on rent and your phone bill each month. In the right column next to each fixed-cost item, write down how much you pay for each item every month.

How to Budget Variable Living Expenses

The rest of the items on your list are variable expenses, or things that you pay different amounts for each month. For instance, your electricity bill and groceries likely vary from month to month.

When trying to figure out what amount to put in the right column next to your variable expenses, do some honest research by looking at your bank account. See what you normally spend on things like groceries each month. For utilities, you may want to compare them seasonally. For instance, if you're living in a place with nice summers and cold winters, your electricity bill might be higher in winter from heating.

Since we're making a budget here, you'll want to err on the safer side and write the most you would spend on each variable basic living expense. When you're using your budget later down the line, you'll want the peace of mind that your living expenses are guaranteed to be covered. It's better to be in a situation where you end up with extra cash because you under-spent on your living expenses than to be short.

To make sure you're erring on the safe side, make sure the budget you write down for each variable expense is a number you won't go over. Find the most you've spent on each variable item, add a bit more, and write down that number next to the item on your list. For instance, if you spent the most on electricity in December, take that number, add a small buffer to it, and write that down as your monthly electricity budget.

If your utilities vary a lot by season, consider making two separate budgets (i.e., cold weather, warm weather) that take these different costs into consideration.

Now you should have:

• your take-home pay written down at the top
• a chart with line item living necessities in the left column and the maximum amount you spend on each item every month in the right column

How Much Money is Left Over?

The last thing you need to do to complete Step 2 is to figure out how much money you have left over after living expenses. Add up your entire list of living expenses and write the total below, adding this to the bottom of your chart:

Basic Living Expenses Total: $X

Subtract that total from your take-home pay:

[Take-Home Pay] – [Basic Living Expenses Total] = [Money Left Over]

Now you know how much of your income needs to be set aside every month for basic living expenses, and how much money you have left over for everything else. If you under-spend on your basic living expenses, you can consider it as a bonus.

Step 3: Divide Your Remaining Money Into Savings and Free Spending

Now that you've got your basics covered, you can choose how to budget the rest of your hard-earned cash.

To make things simple, you can put half of it towards savings and paying off debt and the other half towards free spending.

[Money Left Over] / 2 = [½ for Savings & Debt], [½ for Free Spending]

Why to Budget for Savings Now

You can adjust this ratio according to your income, but don’t skimp on savings. Having at least a small buffer for minor emergencies and putting money into your 401k are small things you can do with big payoffs.

Since your 401k compounds, the earlier you put in money, the better. Your money will grow and grow, compounding on itself, by just sitting there in your 401k account. Even if you’re only putting a small amount into your 401k each month, having time on your side by doing it now will earn you money effortlessly for years to come.

Savings and Paying Off Debt

Like with your basic living expenses, you should write out each item in the left column and the amount to budget next to it in the right column. For savings and paying off debt, some things you might put in your budget are:

Savings and Extra Debt Payments:

• 401K
• Emergency savings
• Extra money towards student loans
• Savings for trip/wedding/house/car

Savings and Extra Debt Payments Total: $Y

Like with your basic living expenses, remember to write the total of your savings and extra debt payments below this section of your budget.

Free Spending

For free-spending, write down any monthly bills you pay and how much they are. Anything leftover can be freely spent on fun things, such as eating out, going to bars, and going to events. At the bottom of your list, write down something like “fun money” and how much is left over after taking into account everything else in your budget. This part of your budget may look like this:

Free Spending:

• Hulu and Netflix
• Gym membership
• Fun money

Free Spending Total: $Z

Fun Money Budgeting Tip

Now when you're out and about and thinking about spending money, all you have to think about is your “fun money” number. If you want to make sure you don't spend all of your fun money at the start of the month, divide that number by four and stay under that limit each week.

Monthly Budget Summary

When you're all done, your budget should look something like this:

Take-Home Pay: $AA,AAA

Basic Living Expenses:

Savings and Extra Debt Payments:

Free Spending:

 Your three subtotals should add up to equal your take-home pay. Using the example above, $X + $Y + $Z = $AA,AAA.

Tips on Adjusting Your Budget

Many money experts suggest that 50% of your take-home pay goes towards your basic living expenses. If your basic living expenses take well over 50% of your budget, you’re not alone, but it may be time to rethink things. The more you live within your means, the better off you will be in the future thanks to decreased debt, emergency savings, and retirement savings.

If you find yourself coming up short after budgeting your basic living expenses, there are two things you can do. You can find areas where you can reduce your spending, or you can increase your income. For the greatest effect, you can do both.

Reducing Spending

There are a few strategies you can take when it comes to reducing your spending.  The thing they all have in common? They're sustainable.

Being decisive about what you are and are not going to spend your money on will take that unnecessary stress out of your life.  For instance, you don't want to spend your limited time and energy stressing about whether or not to buy coffee every morning. It's better to either decide to buy it and let yourself enjoy it guilt-free. Whether you budget coffee for every day, once a week, or decide that money could be better spent elsewhere, make a decision and stick to it.

Think Big Before Going Small

Before nitpicking at small purchases like coffee, think big. While daily coffee purchases do add up over time, they have a high mental cost since you're making that decision daily. What are things that you could be saving money over the long haul that you could change in one sitting?

If you have a car, that's a good place to start. You could negotiate your car insurance, get a less expensive car, or buy an older car outright rather than making monthly payments on a newer model.

You could also negotiate a lower cell phone plan, and cancel services and subscriptions you hardly use.

If your income is almost entirely eaten up by your basic living expenses, it may be time to think really big and consider moving to a more affordable place. Think of the money you’d have each month in your pocket that you didn’t have before to decide and what you’d do with it to decide whether or not it’d be worth it.

Create New Habits

Making a conscious decision to change your lifestyle by creating new habits is another effective way to reduce spending. To make these new habits stick, the key is to remove as many barriers as possible. You want to make it easy to do these new habits and hard not to.

For instance, if you end up eating out often because there's nothing at home, you can create a weekly grocery shopping list and plan. Dedicate a certain time each week on meal planning and grocery shopping. Make sure you plan times in your week for cooking, too.

Increasing Your Income

There are two main ways you can increase your income. You can either work on making more money at your current job, whether that's through negotiating for a raise or getting a new job. The other way you can rake in more cash is by getting a side job or starting your own business.

Make More Money Through Your Main Job

If your goal is to make more money through your main job, you should definitely check out Payscale.

If you're looking to get a raise, Payscale can help you determine your worth. If you're getting paid less than you're worth, bringing in Payscale information to your boss can be powerful for negotiating a raise.

Get a Side Job

You could always increase your income by getting another job on the side. With the modern gig economy, there's lots of options. If you have a car, there are flexible taxi options like Uber and Lyft. Similarly, there's food delivery options such as Postmates and Grubhub if you'd rather be driving food around than people.

No car? You could always walk dogs through Wag, or through your own volition. You could also do things like tutoring through a company or privately.

If you're tech-savvy, freelancing online is another trove of side income options. You could write, code, and tutor online to name just a few.

There's always more traditional part-time jobs too if you can find one that works around the schedule of your main job.

How to Stick to Your Budget with Psychological Hacks

Now that you've got your budget figured out, it's time to make it easy to stick to.

The best thing you can do to ensure you stick to your budget is to funnel your money where you want it to go automatically.

Automating Your Income to Different Bank Accounts

Your employer can have your paycheck split and sent to two different accounts. You can use two accounts: one you use regularly and one you pretend doesn't exist as far as your day-to-day life is concerned.

Take your ‘Savings and Extra Debt Total' from your budget and have that amount automatically sent to an account you rarely access. I recommend using a high yield savings account so that your money is working hard for you by just sitting there.

The rest of your paycheck can be funneled to your main checking account, which is where your basic living expenses and free spending money can park.

Why should you bother doing this? Two reasons.

First, it helps protect the most vulnerable part of your budget. If you're looking to spend more money than is allotted in your free-spending, it's not going to be coming out of your basic living expenses. That means it's inevitably going to be coming out of your savings and extra debt payments budget.

If you have this money already funneled to a different account, you'll have to actively take it out of there and violate your own budget in order to use it. By creating this barrier, you’ll be less likely to spend it out-of-budget.

Second is that you can ‘pretend' your income is only what gets deposited into your main checking account. You'll get mentally used to seeing that number and having that much money to work with each month. Making this mental switch is essential when it comes to actually sticking to your budget.

Automating Your Bills

After you've automated your paycheck to separate accounts, it's time to automate your bills. Automate all of the living expenses you can to make sure they get paid. It's still a good idea to at least glance over your bills to make sure you were billed correctly if you have automatic payments set up.

From your savings and extra debt payments budget, automate payments to your 401k and any other retirement funds you may have.

Make Extra Payments Towards Debt Manually

For the extra money you have saved up to go towards debt payments, it's psychologically satisfying to pay those manually. Paying over the minimum on debt will save you money down the road since you'll be paying off the debt faster. Watching that debt go down can help you stay motivated and committed to your budget for the long haul. Take the time to make those extra debt payments every month or every few months, and bask in the glory of conquering that debt.

To pay off your debt as fast as possible, pay off your debt in order from highest interest rate to lowest, regardless of the balance. If you’re having trouble with motivation, try paying off your smallest debt first to gain a faster win under your belt.

Consider Digital Envelope Budgeting

To help keep the rest of your budget in line that's not already automated, consider using a digital envelope budgeting tool like Mint. This connects your budget directly to the income in your accounts and organizes transactions into your budget categories for you.