Budgeting is a crucial step toward a healthy financial life. It allows you to look at your monthly income and create a clear action plan of what you will do with your money before you spend it. Whether you’re planning to pay down debt, save for retirement, or tame your spending on groceries every month, budgeting can help you achieve your financial goals faster.
Key Takeaways
- Budgeting gives you control over where your money is going.
- Choosing the right budgeting strategy can help you achieve financial goals.
- Creating wiggle room makes it easier to stick to your budget.
- Prioritizing savings can provide better financial stability.
Know Your Income
All budgeting starts with knowing your monthly after-tax income, also known as your “take-home” pay. Getting a complete picture of where your money comes from will help you create the foundation for setting your spending and savings goals. Begin by identifying how much money you can expect to bring into your household each month.
Income may come from multiple sources, including your regular paycheck, a side hustle, child support, or government benefits. You can calculate total monthly income by listing each source of income, then writing down the minimum amount each one will bring in after taxes.
Note
If you are self-employed, you may have inconsistent income. Consider using your earnings from the lowest income-earning month you’ve had in the last two years as the baseline amount when setting up your monthly budget.
Choose Your Budgeting Strategy
Budgeting can feel like an overwhelming task for some people. But keep in mind that the best budgeting method is the one that works for you. “There are many great ways to budget, but each plays to different skill sets and financial goals. So don't feel like you have to conform to a strict method,” Kari Lorz, a Certified Financial Education Instructor (CFEI) and founder of Money for the Mamas, told The Balance in an email interview.
50/30/20 Budgeting
If you’re looking for a simple budgeting method, the 50/30/20 budgeting strategy may be worth a try. It works by splitting your monthly income into three categories: needs, wants, and savings.
| Take-Home Pay | Budget Category | Type of Expense |
|---|---|---|
| 50% | Needs | Mortgage/rent, food, utilities, transportation |
| 30% | Wants | Eating out, shopping, vacations, entertainment |
| 20% | Savings | Emergency fund, debt payoff, retirement |
Zero-Based Budgeting
If you want to know where every dollar you earn is going, you may like zero-based budgeting. It lets you control your spending by determining where every dollar goes before you spend it.
Note
Zero-based budgeting is not about spending your money until you have nothing left. It means allocating your money toward your expenses and goals so that if you have money left after expenses, you’re intentional about dedicating it to a goal like debt payment or savings.
Categorize your expenses and figure out exactly how much you’re going to spend in each category and on what. You’ll probably want to first allocate funds to food, housing, utilities, transportation, debt repayment, and other essentials.
Next, you might allocate a certain amount to building your emergency fund or contributing to a savings account for a new home. What’s left may go to entertainment, travel, or other fun expenses. At the end of each month, you’ll get a chance to redo your budget and change anything you need to.
Cash Envelope
The cash envelope strategy works well for people who prefer a more concrete, hands-on budgeting system to help get spending under control.
This technique involves labeling envelopes based on your budget categories—for example, groceries, utilities, and transportation. You then separate actual cash into each envelope.Once the money is gone, that’s all you can spend on that item for the month. This method can create an acute awareness of where your money is going, making it much harder to overspend.
Note
There are envelope budgeting apps you can use for electronic funds and credit or debit card payments if you don’t want to use cash to pay for everything.
Give Yourself a Margin
Always trying to keep track of every dime you spend can feel tedious. So setting aside a certain amount of money to be your margin of error every month is a way of creating breathing room in your budget. “A margin is the secret sauce for maintaining a monthly budget and achieving your financial goals,” Damian Dunn, Certified Financial Planner (CFP) and Vice President of Advice with Your Money Line, told The Balance in an email interview.
However, make sure you’re still financially responsible. You can add a little flexibility into your budget, but keep track of your spending so you don’t go over the margin you’ve given yourself.
How To Create a Margin
The key to creating a margin is to identify how much of your income you don’t need to spend each month. That’s your buffer, or margin. “A margin allows us to absorb the unexpected things that pop up every month without needing to resort to credit or raiding the emergency fund. Ideally, I love to see budgets with 5% to 10% of margin,” said Dunn.
Dunn knows your margin is affected by life circ*mstances, “But once you've got a margin, fight like crazy to keep it.” In other words, don’t let lifestyle creep eat away at that buffer.
Pay Yourself First
When trying to budget a host of expenses, finding money to save sometimes seems impossible. Try budgeting for your savings before anything else and paying your bills with what’s left after you’ve planned for your savings. This is often called “paying yourself first.”
To do this, set up automated savings contributions so you can save money before you start spending your paycheck.
“Automated savings contributions help create an out-of-sight, out-of-mind approach. I would argue that it’s difficult to ever get ahead when you don’t make your savings a priority in your life,” Lorrie Delk Walker, a financial advisor with Allen & Company in Lakeland, Florida, told The Balance in an email.
Use a Budgeting App
When you need extra help staying on top of your spending, a budgeting app can help you track your money right from the palm of your hand. The right app for you is one whose features and costs best suit your financial needs. A few popular choices include:
- Mint by Intuit: This is a free tool that links all your accounts, categorizes your transactions automatically, helps you set up budgets, and tracks your spending.
- You Need a Budget (YNAB): This app uses the zero-based budgeting system. You can also link your accounts, manage spending, pay down debt, and save. It is a paid service that offers a free trial.
- Pocket Guard: Helps you optimize spending, link your accounts, and save automatically. The basic version is free.
Track Your Progress
At its core, budgeting is simply a spending plan. Keep track of your spending to see what’s working, where you’re struggling, and where your money is going. In the beginning, it may help to track your spending on a daily or weekly basis, and assess your budgeting method every month or so. Once you’ve settled on a method you think works, you can make assessments after longer intervals.
“Tracking progress and making adjustments is critical,” Jeff Grampp, CFF and director at Gateway Investor Relations, told The Balance in an email interview. “The costs of things change over time, as do consumption habits. So every year or so, take time to reassess where you're at and gauge the accuracy of your budget."
Frequently Asked Questions (FAQs)
What is budgeting?
Budgeting is the process of making a consistent and intentional plan for your money. Make sure your budget works for you. If you feel limited by your budget, it may be time to change it. Make sure your budget includes some fun goals or splurges. That way, you’re more likely to stick with it.
Why is budgeting important?
Budgeting is important because it makes sure you have enough money to cover your expenses and that you’re intentional about what you do with the rest of your money. It helps you pay close attention to your spending, savings, and general financial health. When you create a plan and set goals, it’s easier for you to control your finances and make informed decisions about your spending. It’s also easier for you to identify financial risks and opportunities.
What are some common budgeting mistakes?
Sticking to a budget can be tricky, and being restrictive doesn’t help. If your budget doesn’t have any margin for error or you’re too hard on yourself, you might get so frustrated that you give up on your budget. You should also make sure to track your spending, set money aside for an emergency fund, and review your budget regularly to make sure it’s up-to-date.
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I'm a financial expert with extensive knowledge in budgeting and personal finance. I've worked with individuals and provided guidance on creating effective budget plans to achieve financial goals. Now, let's delve into the concepts mentioned in the article on budgeting.
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Know Your Income:
- The article emphasizes the importance of understanding your monthly after-tax income, also known as "take-home" pay.
- It suggests identifying all sources of income, including regular paychecks, side hustles, child support, or government benefits.
- For self-employed individuals with inconsistent income, a baseline amount from the lowest-earning month in the last two years is recommended.
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Choose Your Budgeting Strategy:
- The article introduces various budgeting strategies tailored to different preferences and financial goals.
- It mentions the 50/30/20 budgeting strategy, dividing income into needs, wants, and savings categories.
- Zero-Based Budgeting is discussed, emphasizing the allocation of every dollar toward specific expenses and goals.
- The Cash Envelope strategy involves using physical envelopes labeled with budget categories, enhancing awareness of spending.
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Give Yourself a Margin:
- The importance of creating a margin or buffer in the budget is highlighted for flexibility and unexpected expenses.
- Financial experts recommend maintaining a margin of 5% to 10% in budgets to absorb unforeseen costs without resorting to credit.
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Pay Yourself First:
- The concept of prioritizing savings by budgeting for it before other expenses is presented.
- Automated savings contributions are recommended to make saving a consistent and prioritized part of financial planning.
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Use a Budgeting App:
- The article suggests utilizing budgeting apps for convenient tracking of finances.
- Mentioned apps include Mint by Intuit, You Need a Budget (YNAB), and Pocket Guard, each offering different features and cost structures.
-
Track Your Progress:
- Budgeting is defined as a consistent and intentional plan for money, with the importance of tracking progress and making adjustments over time.
- Regular assessments, either daily, weekly, or monthly, are encouraged to ensure the effectiveness of the chosen budgeting method.
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Frequently Asked Questions (FAQs):
- The FAQs provide concise answers to fundamental questions about budgeting, emphasizing the need for a flexible and intentional plan that aligns with personal goals.
In summary, the article covers a comprehensive range of budgeting concepts, from understanding income sources to choosing suitable strategies, creating a margin for flexibility, prioritizing savings, using technology with budgeting apps, and tracking progress over time.
