How to budget: 6 steps and budgeting tips

How to budget: 6 steps

1. Set a budgeting goal

Are you trying to save a specific amount each month? Do you want to pay off debt? Are you saving for a particular goal like a holiday or home deposit? Or do you want to just have visibility into your finances?

Having a clear goal will help define your budget.

2. Calculate your total income (money coming in)

If you work full-time, just check your pay slip to determine your after-tax income. If you work casually or across multiple jobs this may be harder to calculate, but you can just use an average of the last 3 months of your income to get a good estimate.

Remember to include all sources of income:

• Your salary (remember to record whether this is weekly, fortnightly or monthly)
• Passive income from side hustles
• Pension or government support
• Investments
• Child support payments

3. Calculate your total expenses (money going out)

This step will take the longest because it's the hardest (and probably the most important!). You need to have a clear idea of your current spending for any future budget to work.

Start by looking at your bank statements for the past month (or the past 3 months if you want a more accurate picture) and list out everything you spent money on. Then, begin to categorise.

Essential expenses

The first category will be your fixed expenses. This is for things that you will need to pay for in order to live such as your rent, energy bills, groceries, petrol and repayments for debt like your credit card.

Other important and necessary expenses such as transport and medical costs can go into this category.

Non-essential expenses

All other expenses can be put into the non-essential expenses category. It's tricky because some expenses in this category are essential (like clothing) but they just aren't essential every month.

Expenses that belong in this category are things like streaming service payments, takeaway meals, trips away, beauty, movie tickets and other entertainment. Make sure you list out even small purchases like takeaway coffees.

4. Review your current spending and expenses

Take a look at your spending and see where you can make some savings by cutting out some things. The budgeting process is a great time to reevaluate some costs such as streaming services or other subscriptions, or even how much you're spending on takeaway.

You might not realise how much money you're actually spending each month on seemingly small purchases (like coffees). Or you might notice that by ducking to the grocery store a few times a week you're actually spending a lot more than you would if you planned for one big shop instead.

5. Set your goals: Spending, saving and debt

Now that you know how much money is coming in (income) and how much is going out (expenses) you can set goals.

Spending goal

Your expenses are all listed out, so now you can set a goal for how much you want to spend in each category. Remember to allow yourself a buffer because not all expenses have set amounts each month.

Debt goal

If you have debts (credit cards, personal loans or similar debts) you need to create a goal in your budget to pay them off. Home loan debt isn't included in this section because it is considered a fixed expense.

Your debt goal might be making the minimum required payment each month or it may be making extra repayments to get your debt repaid faster.

You can use a debt repayment calculator to help you here.

Saving goal

You know how much you can spend and how much you have to pay off your debt, so how much can you save? Set a realistic but ambitious savings goal that aligns with a tangible goal such as saving for a house deposit, a piece of furniture, a car or a holiday.

6. Track, track, track

You can't budget without tracking. But don't worry – there are a lot of options for budget tracking. You can use a budget tracking app, a spreadsheet or even pen and paper if that's your preference.

Your banking app might have an in-built budgeting function, too.

My top budgeting tip

"Pay yourself first! When I get paid each month, I make sure to pay any bills I need to pay and set some money aside for other upcoming expenses, like rent. But I also consider paying myself as another bill.

As soon as I get paid, I put a certain amount into my savings right away, just like it were any other regular bill. I treat it as a non-negotiable. This means I am free to spend the remaining money however I want to throughout the month, because I've already paid myself and ensured my savings balance is growing.

If I instead waited until the end of the month to transfer any remaining money into my savings, I might not have anything left to transfer! This is why I do it first."

Alison Banney

Editorial Manager, Money

Popular budget strategies

You don't have to start from scratch with your budget, here are some budgeting strategies to consider:

The 50/30/20 budget

The 50/30/20 strategy divides your money into 3 different buckets: needs, wants and savings. From here, 50% of your income is allocated towards needs (housing, bills, groceries, etc), 30% is allocated towards wants (eating out, streaming, weekends away, shopping) and 20% is put towards your savings.

If you're struggling to save 20% of your income, you should take a look at how much you're spending on things you "want" but don't "need" and make some cuts in order to hit the 20% savings goal each month.

The zero-based budget

Using this strategy, there is zero money left unaccounted for each month. This goes quite a few steps further than the 50/30/20 strategy and assigns each dollar you earn to a particular expense or item each month.

So instead of looking at a general category for bills, you'd break down each bill you expect to pay that month and the exact cost of each. Similarly, you'd track every coffee or meal out down to the last cent. This strategy relies on you being very organised and committed. It would likely require the use of a budget planner, spreadsheet or other tracking tool.

The pay-yourself-first budget

This strategy is simple yet very effective. Basically, you set yourself a savings goal each month and ensure you meet this before you pay for anything else.

For example, if I wanted to save $1,000 a month, I'd transfer $1,000 to my savings the minute I get paid and treat this like it's a non-negotiable bill or monthly payment. Once I've done this, I'm free to spend my money however I choose for the rest of the month because I know I've already made sure my savings goal is met.

The envelope or bucket budget

This option can be used with one of the other strategies. After determining how much you can spend each month on "wants", you then break this down further into specific categories such as eating out, entertainment, personal care and retail shopping which are each assigned a monthly limit.

You then withdraw enough cash for each individual category and keep it in an envelope. Once the envelope is empty, that's all you can spend on that category until next month when you top it up again. If you like this strategy but don't want to use physical cash, you can use different bank accounts as digital buckets instead.

Expert insight: You can use more than one budget approach

"There are many different budgeting methods available, so it's really up to you on which ones resonate well with you. My personal favourites are the 50/30/20 budget and the Pay Yourself First budget, but I use a bit of a combination of both at the same time.

Don't be afraid to use a mix of different budget methods or create your own. It's important to find a budgeting method that works for you and aligns with your current financial situation."

Queenie Tan

Founder, Invest With Queenie

Budgeting tips

Switch to a high interest savings account. If you're going to be saving, make sure your money is working for you with a high interest savings account. This will ensure any money held in the account will earn more interest and you could be hundreds of dollars better off by the end of the year.

Get a budgeting buddy. Just like going to the gym with someone else keeps you accountable, budgeting is easier with a support system. A friend or partner can keep you on track and you can both learn from each other.

Use cash. If you tend to tap your money away, try withdrawing your spending limit for the week in cash. Having the physical amount makes it harder to overspend and you will end up saving on card fees, too.

Leverage micro-investments. Micro-investing apps can simultaneously let you make investments and more easily balance the budget. The premise is simple: whenever you buy something, round it up to the nearest dollar and invest the excess in the share market or in a high interest savings account.

Consider multiple accounts. This is the digital version of envelope budgeting: create multiple bank accounts or sub-accounts, each with its own purpose. You can have one account for fixed expenses, one for discretionary spending, one for saving, etc.

Talk about your budget. Similar to budgeting with a buddy, sharing your budget goals with friends, family or colleagues can help keep it front of mind and help keep you accountable.

How a budget can help you save money

1. Tracks your spending
Rather than "spend and forget", a budget encourages you to track your spending. By doing this, you'll keep your impulse spending low and ensure you don't overspend on certain things without realising it, like eating out (or ordering in!). Tracking your spending also helps you spot areas where you can easily cut back and save.

2. Identifies new ways to save

When you've got a budget and you're working towards a personal savings goal, you're going to be more motivated to find new and creative ways to save. From doing your grocery shopping at night and going meat-free a few nights a week to selling things online and starting a side hustle, there are plenty of ways to save money to help meet your savings goals.

3. Allows you to get more out of your savings

Once your budget is ticking along nicely and your savings stash is starting to grow, you can use this money to generate even more savings. Instead of leaving the money sitting in your regular bank account, consider putting it somewhere where it generates a return, such as a high interest savings account or an ETF.

Frequently asked questions

• What is the 50 30 20 budget rule?

  The 50/30/20 strategy divides your money into 3 different buckets: needs, wants and savings. From here, 50% of your income is allocated towards needs (housing, bills, groceries, etc), 30% is allocated towards wants (eating out, streaming, weekends away, shopping) and 20% is put towards your savings.

• How should a beginner budget?

  If you're just starting out with budgeting, first get a good understanding of where your money is currently going and try to make changes to save. set yourself small, achieveable monthly savings targets to start off with, then gradually increase these targets every few months.

• How to save $10,000 in 3 months?

  To save $10,000 in 3 months you'll need to save $3,333 a month. You can do this by increasing your income (look for ways to bring in some extra cash) and also drastically reducing your spending.

• What are the biggest budgeting mistakes?

  One of the biggest budgeting mistakes is setting yourself a goal that is too hard to reach. If your goal isn't achievable you're just setting yourself up to fail from the start. Start with smaller, more achieveable goals then work your way up as you get better at budgetting.

To make sure you get accurate and helpful information, this guide has been edited by Jason Loewenthal and reviewed by John Pidgeon, a member of Finder's Editorial Review Board.

Written by

Elizabeth Barry

Journalist

Elizabeth Barry is an experienced journalist with over 10 years of expertise in personal finance, contributing to outlets like the ABC, Sydney Morning Herald, and 7News. She holds a Master of Arts in Creative Writing and a Bachelor of Arts in Communication from the University of Technology Sydney, and has earned multiple award nominations, including a Highly Commended recognition at the 2017 Lizzies. Elizabeth began her career at Finder in 2013, progressing through roles to become Lead Editor, where she oversaw a wide range of personal finance coverage until 2024. See full bio

Elizabeth's expertise

Elizabeth has written 202 Finder guides across topics including:

• Banking
• Personal finance
• Investing