How to make a budget for 2021 — essential tips for saving money

The new year marks an ideal time to build and review your budget — a record of how much money you bring in and where you spend it. Most people have a firm sense of how much money they earn, based on their salary and paycheck from a full-time employer or from a pattern of self-employment. However, tracking where your money goes is trickier.

Many adults avoid a cold-hard-light-of-day reckoning with what they’re spending because it’s hard to un-see what a budget reveals. Most budget reviews show where you waste money, ways your lifestyle exceeds your earnings, and ways you could reduce or sacrifice some expenses to better live within your means or save more.

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Budgeting isn’t meant to shame you. Instead, making a budget empowers you to make informed decisions about your priorities. Perhaps you can live without a few of your favorite splurges each month if that means you can fund a great vacation. Maybe negotiating with your mobile phone provider or refinancing a mortgage would save hundreds of dollars per month that could go toward accelerating debt repayment or saving for a major purchase (computer, home repair). If you don’t crunch the numbers, over time the numbers may crunch you.

Here’s everything you need to know about making a budget. 

How to make a budget: Where’s your money coming from?

To make a budget, you need a clear sense of income and expense sources. Income sources include your salary, the sum of your 1099 work as a contractor, any income from rent (Airbnb, subletter), or income from other sources (child support, royalties, side hustles, etc.).

Most people have a clear sense of their income, but if it arrives sporadically or varies in amount, try tracking it over the course of a month using the Income and benefits tracker tool from the Consumer Finance Protection Bureau. 

How to make a budget: Calculating your expenses

Expenses include your needs (food, clothing, shelter, transportation, phone), desires (leisure activities, dining out), debt repayment, charitable or gift giving, and saving for the future (big-ticket purchase savings, emergency savings, savings above and beyond an employer’s 401k plan). If you want to go old-fashioned, review bank statements and credit cards online; if you tend to use cash, invest in a notepad to track spending or save receipts. Some credit cards offer “end of year” summaries of spending by category to help customers assess their behavior. You can track expenses using this worksheet from the Consumer Finance Protection Bureau or you can use this combination income and expense worksheet provided by The Federal Trade Commission.

If you have the time, tracking your budget for the entire prior year can be instructive and give a very clear picture of where your money goes. At the very least, tracking your budget for one quarter (or three-month period) will give you a sense of where small, everyday expenses begin to add up — from pay parking and lunches out, to lattes or a collection of $5 and $10 app subscriptions. Once you’ve begun to see patterns in your spending, you can decide if you need to change your behavior and, if so, where. 

How to make a budget: Apps to manage your budget

Want to automate your budgeting? You’re in luck. You can use apps such as Pocketguard, Mint, You Need a Budget, or NerdWallet to monitor spending and cash flow. (Your cash flow is positive if you had money left at the end of the month, negative if you spent more than you brought in.) These apps work by syncing to your accounts and automatically analyzing spending activity.

Many of these apps send you alerts when you receive deposits, if your credit score changes, you max out a certain spending category, or if other metrics of your financial health shift. Powered by AI, these apps don’t judge you -- they simply report the news, and they do so early and often so you can course-correct spending habits that may run counter to your goals. Check out the best budgeting apps we’ve evaluated. 

How to make a budget: What’s a realistic amount to spend? 

Your budget provides you with a comprehensive look at what you’re doing with your money. Depending on your age, life stage, and geography, your budget makeup may look very different from someone else’s. Still, it’s helpful to gauge what financial experts recommend as reasonable percentages to spend on different expense categories, so that if you reallocate how you spend your money, you’re realistic about your plans.

Perhaps renting a room in a group house with friends in your 20s only consumed 15 percent of your income, but one day you plan to own a home. Chances are, you’ll need to budget much more than 15 percent of your income to pay for a mortgage. In other words, don’t get stuck on a budget components from one life stage as you enter another. 

Senator Elizabeth Warren is credited with popularizing the 50-30-20 budgeting method, in which 50 percent of income is allocated to needs, 30 percent to wants, and 20 percent to a combination of savings and debt. Check the box below to see how a person bringing home $5,000 per month in after-tax income might manage a budget with this framework.

There are other budgeting methods, however. For those just starting out, an 80-20 budget, where 20 percent of the budget goes to savings and the rest to necessities and wants, is a method that will force you to set aside 20 percent no matter what for savings and adjust expenditures to live on the rest. In the example above, the same person would need to trim $750 in expenses to set aside $1000 per month in savings, which would include emergency savings as well as other savings such as optional retirement accounts.

How to make a budget: Reverse budgeting

Reverse budgeting can be useful as well, notes Goldman Sachs company Marcus. In this approach, rather than taking your income and paying expenses from it first, you focus on paying yourself first (in the form of savings) and then living within the rest of your means. This sort of approach can be useful for a self-employed person or someone with variable income streams, so you understand just how much you need to earn to "hit your numbers" and where the funds go first, setting aside for saving and then addressing other core expenses. If cash flow is positive, you can use the unlocked discretionary funds however you want.

Other factors can influence how you manage your budget. Lenders offering mortgage loans and many landlords ask for evidence that you spend no more than 30 percent of income on housing, meaning that if you plan to seek a mortgage or lease it’s good to line up these metrics, if you can, prior to applying for a loan or new rental. Of course, income size and local housing expenses can vary widely. (If you’re earning $100,000 and spending more than 30 percent on housing, you’ll still have higher disposable income left over than a professional paying $12,000 a year on rent from a $40,000 salary.) 

How to make a budget: Put your budget to work

There are several common reasons people review their budgets: They know they spend more than they earn; they want to learn exactly where their money goes; or they’re assessing how to adjust spending so they can save more,  finance a goal, or increase emergency or retirement savings contributions.

If you’re seeing negative cash flow, double-check that you’re actually factoring in every single expense. It’s easy to forget small transactions ($5 coffee drinks, a $10 monthly fee for an app, $15 bank fees), which can add up over the course of the year, or perhaps you’re under-budgeting — planning to spend less on variable expenses (groceries, utilities, gas) than is realistic.

If you’re tracking your budget manually, go over your information sources with a fine-tooth comb, and if you’re using an app, well, machine intelligence doesn’t lie. If you’re in the earlier, lower-earning years of your career and you’re eligible for a raise or considering switching jobs to get one, or if you’re able to earn funds from a side hustle or freelancing, your budget presents clear evidence of just how much you need to earn. If you’re more experienced, your budget may indicate where you’ve been splurging — you, too, can opt to earn more, but at some point you’ll need to replace an "earning more" habit with a “saving more” habit so your lifestyle doesn’t outpace income.

If your cash flow is positive but you’re gob-smacked to learn how much you’re spending on certain wants, consider ways to pare costs and where you’ll re-assign funds you unlock. Nixing a $500 annual flight to your favorite hotspot and spending $150 to drive to a regional retreat instead saves $350 that could go toward savings. Reducing a monthly dining-out budget to $150 from $250 would unlock $100 per month or $1200 per year. That might be enough to bump up savings for a goal like a down-payment on a home or new car. If you’re hit with seasonal costs — higher winter heating bills, a spendy Christmas gifts tab, physical therapy during your soccer season — tally what those expenses look like and plan to set aside a little each month for them.

Once you really understand where your money goes, you can optimize the way you spend it. Those on any budget may wish to periodically review ways to lower routine expenses. Sometimes you can save money with no compromise in service by simply calling your Internet or mobile phone service provider and asking about new plans. Consider, too, ways to save on groceries — joining a warehouse club or doing more from-scratch cooking will dramatically lower a monthly food tab. Mortgage and student loan refinancing are other infrequent but impactful maneuvers that can help you lower payments on debt, often by several hundred dollars per month. But optimizing won’t help much if you don’t first make the effort to understand what you normally spend.