5 Ways to Create a Budget That Works

young couple calculating bills

According to a Consumer Financial Literacy Survey, only 39% of Americans have a budget and keep a close track of their spending. This may not be too surprising since many believe budgeting to be a hassle and sticking to a budget constricting. However, with more and more American’s with little to nothing in their savings account, the need for personal financial planning and accountability could prove more important now more than ever before.

The key to keeping a budget is to create one that works. This takes proper planning from the beginning, and developing and exercising financial habits that might feel a little painful at first. The good news is, developing the techniques that will make you a good budgeter can propel you into gaining control in other aspects of your financial life, like planning for your future with a sound retirement plan.

Here are 5 measures to take to make sure you are creating a budget that works.

1. Record Exactly What You Make and Spend and Do it all Over Again

The beginning of creating a budget is to track every outgoing expense you have for one month. Not only do you need to account for every bill paid, but you need to keep track of every transaction where money is exchanged (including any credit or debit card purchases). While it may seem tedious to save and record every receipt from the donut shop or Netflix rental, an accurate accounting of your spending will lay the foundation for a realistic budget that you can stick with. Once you have tracked your spending, write out all your expenses on a sheet of paper or spreadsheet.

Now that you have a very good idea of what you spend in a given month, record all revenue streams coming into your household. This will include your paycheck, your spouse’s paycheck, any money coming in from a side job, etc. Depending on how often you get paid, you may want to correlate your expenses with the week(s) of your deposit.  For example, if you are paid on the 5th of the month and your mortgage is due on the 10th, you can align part of your paycheck with that liability. If your expenses to revenue is off balance on one side of the month, use a separate account tied to your checking as a holding space until the time to transfer funds when the payment(s) due. (Side note: if you have too many bills due at a given time, don’t be afraid to ask your lender(s) for a different due date on future payments).

Next, map out your budget by giving every dollar of revenue you have a name and a responsibility. Every item that you tracked for 30 days will become the bones of your new budget, and each expenditure needs to have a dollar amount assigned to it. If you took your children to McDonalds last month and that seems to be a regular activity, make sure to account for it in this month’s budget by assigning it the dollar amount needed.  You may anticipate other expenses this month that you didn’t have the month previously, or you may have had purchases from last month that you will not need to make this month. This is why you need to make a new budget every single month! Also, remember to include a savings category in every monthly budget. Sure, to make room for savings you may need to omit some unnecessary items, but remember that budgeting is not a limitation, but a way to make the changes needed to have the future you are dreaming about.

2. Be on the Same Page as Your Spouse

If you thought the tracking, mapping, and recording was difficult, getting on the same page as your spouse could prove to be your greatest budgeting accomplishment. While you and your spouse may fit into the pattern of most couples with one partner being the so called “spender”’ and the other the “saver,” without coming together with a common goal of managing your money, you will be a part of the majority who haven’t a clue about what they spend each month. But remember that to be different from the average American, you need to act differently, and that means negotiating with each other to come up with a budget that fits both of your needs and desires.

Once you make the budget each month and agree to the mapped-out spending and savings plan, stick to it! Don’t let one or the other of you sabotage your budget with an unaccountable large purchase. If a spending need arises that has not been budgeted, it needs to be talked over and agreed to before the purchase. Because everyone needs to feel some freedom in making their own indiscriminate purchases, you and your spouse may want to consider a “mad money” category in your monthly budget (more below). Keeping ongoing communication about the budget and a weekly planning meeting (15 minutes should suffice) should keep you both focused on your monthly plan.

3. Account for the Budget Busters

First off, there is no possible way you can account or plan for every circumstance or event that could really mess up your budget. Simply stated, life happens and adjusting your plans, and your budget, is just the name of the game.  However, there are some things you can do at the start of each month to prepare for the often-forgotten expenses (aka budget busters).

Start by accounting for the quarterly bills and premiums that are often forgotten when planning a monthly budget. Too often our monthly spending comes close to matching what we earn, so when the often forgotten quarterly bill or insurance premium arrives we are at a loss at how to pay for it. The easiest way to account for that expense is to break down the monthly cost of the bill, transfer it into a holding account that is aligned to your checking and then transfer the money when the payment is due. This will keep your budget intact and your nerves in check when a forgotten statement comes in the mail.


It’s also important to go through this same process for future events or medical expenses you need to plan for. Creating categories in the budget for Christmas gifts, a family vacation, or an upcoming health procedure can allocate funds well before they are needed. Being able to create and name several accounts (i.e. medical, Christmas, or family vacation) linked to your checking will keep your savings for the items ready and available when you need them. It’s also key to account for credit card purchases, because these are often overlooked until the monthly bill arrives. Get started by checking how to calculate the minimum credit card payment, and look at just how much adding extra money to your payment can pay off in the long and short run.

Because budgeting can feel restrictive, it’s important to categorize “mad money’ for both you and your spouse. Mad money is simply a small, yet, unaccountable amount of money that you and your spouse allow yourselves to be saved for a larger purchase, or to be used for the occasional impulse purchase. The purpose of mad money is to give you and your spouse some freedom to spend independently without feeling guilty. The trick is to determine each month the equal amount that will be given to each person and then to stick to that amount throughout the month. When the mad money is gone, so is the “free spending.”

4. Review and Adjust

To be a successful budgeter, you always need to review your categorizing and your spending. Reviewing often will help you to spot categories that might need adjusting so that new ones can be added. For example, during the summer the school lunch budget might be replaced with a few weeks of swimming lessons, or your teenager’s guitar lessons could be traded for driver’s ed instruction. As the needs of your family change, so will your budget. Reviewing your budget will also help you to find areas that could be adjusted to reduce your total spending.  Groceries and eating out usually take a large portion of a family’s budget. With small changes, you could see a significant savings that could go towards debt reduction or retirement savings. If you and your spouse would like to know if your retirement savings are sufficient, look at our retirement calculators for couples to get a good idea where you stand.

Remember to adjust your budget with income changes and debt reduction. Following a budget can expand your savings with every increase in salary, and with every debt that has been paid off. Making sure you are constantly reviewing and updating your budget will give you the most value in every dollar you have coming into your household.

5. Be Patient and Persistent

Creating and following a budget is a lifelong endeavor, and just like any other learned skill, it takes practice to get it right. Even when you are knocking it out of the park and you think you have accounted for every possible scenario and expense, life can throw you a punch that can knock you off your financial footing. The key is to keep trying. Patience with yourself and your spouse and constant persistence will be your greatest virtue in the budgeting process. While budgeting gives us a glimpse into the future, always remember to take a minute to look back and see just how far you have come.