While simply hearing the word “budget” can send even the most laid-back person into a panic, setting a budget is really an essential step in taking control of your personal finances. Don’t believe us? 3 in 5 Americans don't know what they spent last month, and 18% of workers with salaries greater than $100,000 are living paycheck to paycheck. By setting a budget, you will not only keep on top of your spending and see opportunities for savings, but you will also enjoy greater financial freedom by making a plan and sticking to it. It’s an important step in your financial plan, and with the help of this guide, it can be an easy one.
The Ultimate Guide to Budgeting
Updated: May 29, 2024
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Spending Habits in the United States
Many people, particularly Gen Z and young millennials starting out in the workforce, are unaware of their actual spending.
According to a survey conducted by Intuit’s MintLife blog, 65% of Americans said they didn’t know how much money they spent in the previous month. The survey found that Gen Z is the least likely to know how much they spent.
One study of young Americans found that reduced consumption correlated with a better sense of well-being. One way to reduce your spending is by simply tracking it and becoming aware of what you spend.
According to MoneyGeek study findings, debt has risen by 3% since the first quarter in 2020.
Between circumstances related to the pandemic and rapidly rising inflation, saving isn’t easy.
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What Is Budgeting?
A budget is an outline of your expected expenses and actual income. Budgeting means you know how much money is coming in and out of your accounts each month, and allows you to get a better grasp on where you spend the most and how you can cut spending, such as limiting the amount of money you spend during the holidays. Anyone can create a personal budget, including retirees on a fixed income, and it is crucial for businesses to create a corporate budget. It’s important to include a comprehensive list of your monthly expenses — like rent, mortgage and utility bills as well as things like clothing, entertainment and travel — and your projected income.
5 Budgeting Misconceptions You Should Stop Believing
There are many reasons, or myths, that keep people from creating a budget. Most can be easily debunked. Creating a budget doesn’t require a degree in accounting or even a lot of time. Once you get going, the process gets quicker and easier. It can be a helpful reference for you month to month.
1
Creating a budget is difficult.
Setting a budget requires only basic math skills, and no one will judge you if you use a calculator. You can even use apps to help you, including Mint and Goodbudget.
2
Budgeting is time-consuming.
Once you take the initial step to itemize your expenses and income, you’re off to the races. Instead of thinking about the time involved, think of it as an important step in ultimately reaching your financial goals.
3
Why do I need a budget when I can work it all out in my head?
Many people think they are on top of their spending, but when asked to recall what they spent where, they draw a blank. Even if you’re on a fixed income and have the same expenses month to month, you can still benefit from seeing your spending on paper.
4
Unexpected expenses pop up all the time, so a budget wouldn’t work for me.
There is an easy way to account for impromptu expenses in your budget. You can call it your rainy day fund or miscellaneous; regardless, it’s helpful to see how much extra money you have left each month for when life happens.
5
I make a high salary, so I don’t need a budget.
A high salary doesn’t mean you don’t need to budget your money. In fact, you may be automatically overspending because you assume you can afford it.
5 Good Reasons to Implement a Budget Now
Setting a budget helps you improve your financial picture for today and tomorrow. Whether planning for early retirement, building a nest egg or saving up to purchase a home or car, sticking to your budget is best for your overall financial health. And don’t think it’s too early to save for retirement, even if you’re currently a college student making limited income.
Get and stay out of debt.
Student loans, mortgages, car loans, credit card interest — it’s all too easy to sink into heavy debt, and that’s why it’s so important to have a budget for yourself. By seeing where you are spending, you can potentially allocate a portion of your money to paying off debt faster by making extra payments on your mortgage principal.
Save for retirement.
Don’t let saving for retirement fall to the wayside because it seems like a long way off. You don’t want to be nearing retirement age and have failed to save anything. You can start contributing small amounts that will compound over time and garner you a higher amount for your retirement.
Make large purchases.
It can be easy to get caught up in the here and now of spending and forgetting about bigger-picture purchases you’d like to make. Whether it’s saving for a down payment on a home or a dream vacation, setting a budget can put your goals in front of you, and having a plan can motivate you to reach them.
Save for an emergency.
Living paycheck to paycheck can be daunting. It can give you peace of mind to have an emergency savings fund. You can start allocating money to this fund by creating your budget and seeing how much money you can have left over to save.
Practical Steps to Creating and Using a Budget
Before creating your budget, it helps to get organized about your cash inflow and outflow. Knowing how much money you bring in each month and how much you will need to spend on bills and necessities can be a good foundation for planning your budget. While it can seem overwhelming if you’ve never budgeted before, follow these simple steps for a seamless way to get started.
1
List your income and expenses.
While many people choose to do their budgets monthly, your budget may depend on your pay cycle. Whatever the time frame, your first step should be gathering your income and expenses and including an itemized and total list. If you’re a freelancer or don’t receive a steady paycheck, it can be helpful to look at your income and expenses over a period of time, such as the past 12 months, to get an average breakdown.
2
Determine the right budgeting platform for you.
You might want to go old-school and write down your budget, or maybe you’d like to use an app that helps you plan your expenses. Think about what tools you use the most every day so your budget fits in seamlessly and can be accessed at a glance.
3
Decide what your financial goals and priorities are.
If there’s a big-ticket item you’re saving for, or you need to start saving more for retirement, keep this goal in mind as you create your budget. Your goals will help you decide where you need to spend and where you can cut back. It’s also helpful to mark down what expenses are essential, like groceries and rent, for example, and which are discretionary or non-essential, like eating out at restaurants.
4
Look for opportunities for savings.
By taking a hard look at your finances, you might find that you’re spending unnecessarily on streaming services you don’t use, for example, while you could be paying more toward the principal on your mortgage each month. It’s also helpful to look at your energy bills and see if you can find savings, thereby adjusting the thermostat if they are on the high side.
5
Adjust your spending.
Consider your budget as a goal you’ll strive to meet. When you see how much you can start saving, it can make it easier to resist those extra costs because you know you’re working towards meeting your goals.
TRICKS TO SAVE MORE
Need a little extra help sticking to your budget? Try these tactics to stay on track.
- Give the credit cards a break: If you tend to carry a balance on your credit card each month, it can be helpful to start using your debit card or cash to pay while adjusting to your budget. It seems like a psychological trick, but seeing the money being deducted can be more effective than using credit. You may find you can trim your expenses using this method.
- Be flexible: While you want financial discipline, you don’t want to go overboard. Allocating some money for treats or fun stuff can keep you motivated to stay on track because you won’t feel like you’re missing out on anything.
- Set yourself up for success: You can resist the temptation to order takeout on a weeknight by meal prepping and stocking your freezer with tasty meals. Instead of shopping for high-priced new clothes, host a swap with friends or search for unique finds on a secondhand site like Poshmark. Get creative, and you’ll be able to have the things you enjoy without breaking your budget.
How to Create a Budget With a Spreadsheet
Using a spreadsheet for your budget is a great way to keep your expenses and income organized. Many free programs are available, and many have built-in templates that make it even easier to set up. Another helpful aspect is that many programs will sync to all your devices, so you can access your budget whether you’re on your laptop or using your mobile phone. Many have features that let you see your budget in visuals, such as a pie chart, which can be a fun and helpful way of looking at your financial picture.
Budgeting Examples for Personal Finances
Budgeting can be intimidating if you’ve never done it before. Still, it can be helpful to see how other people have formed their budgets — especially if their finances resemble yours. Consider some examples to help you get started, whether you’re a student or budgeting for a family of four.
Example Student Budget
Students with a limited income can benefit from having a budget to stay on track and avoid unnecessary spending. And if you work several part-time jobs, you’ll want to itemize your income to see precisely how much you’re making. It can be helpful to have two charts: one for your income and one for your spending. Take a look at the following example charts.
Sample Student Income
Income Type | Expected Income | Actual Income |
|---|---|---|
Part-time job | $500 | $450 |
eBay sales | $100 | $125 |
Babysitting gig | $100 | $75 |
Odd jobs | $100 | $200 |
Total | $800 | $850 |
Sample Student Expenses
Spending Category (Fixed Costs) | Expected Budget | Actual Budget |
|---|---|---|
Rent | $500 | $500 |
Internet | $100 | $100 |
Food | $100 | $125 |
Entertainment/clothing | $100 | $75 |
Total | $800 | $800 |
Example Family Budget
It’s especially important to stay on track if you’re a family on a budget since unexpected expenses can always arise, and you’re accounting for spending on behalf of multiple family members rather than just yourself. A family budget will typically be more detailed than a student or individual budget simply because multiple people are involved. You might choose to break down the income part of your budget individually or jointly if you have a partner who makes income. Consider this joint example:
Sample Family Income
Income Type | Expected Income | Actual Income |
|---|---|---|
Two full-time jobs | $10,000 | $7,500 |
Stocks | $100 | $75 |
Interest income | $1,500 | $1,500 |
Total | $12,500 | $9,075 |
Sample Family Expenses
Spending Category (Fixed Costs) | Expected Budget | Actual Budget |
|---|---|---|
Rent | $2,500 | $2,500 |
Internet | $100 | $100 |
Food | $400 | $800 |
Childcare | $1,500 | $1,600 |
Utilities | $300 | $350 |
Medical expenses | $200 | $800 |
Total | $5,000 | $6,150 |
Effective Budgeting Strategies and Methods
There are many ways you can structure your budget. Some methods are more complex than others. The ideal strategy for you will depend on whether you have a high or low income, your financial picture, habits and goals. Keep the pros and cons in mind when picking a method.
1. 50/30/20 Budget
50/30/20 Budget: Who It’s Best For
Popularized by Senator Elizabeth Warren, the 50/30/20 budget is a way to break down finances into three parts: 50% on necessities, 30% on wants and 20% on savings or paying off debt. It can be a helpful way to give yourself financial discipline and work toward your savings goals while still spending a portion of your money on things you enjoy. You’ll have to be somewhat organized to stick to the plan when following the 50/30/20 budget, though this method requires less effort than other budgeting strategies.
The 50/30/20 Budget in Practice
Say your take-home pay for the month is $3,000. You’ll allocate $1,500 toward essentials like food and rent. $900 can be allotted toward things you want, like streaming services, vacations and going out to eat. The remaining 20%, or $600, should be applied toward any debts or deposited into savings.
GETTING STARTED WITH THE 50/30/20 BUDGET
If sold on the 50/30/20 budget rule, you’ll first want to break down your expenses to see the necessities and what can be considered fun or extraneous. You’ll need to make sure that the budget works for your ratio of income to expenses and that it’s feasible.
Pros and Cons
The 50/30/20 rule is fairly straightforward to use, but there are a few caveats. Whether it’s right for you will depend on your financial habits.
Key Takeaways
- Simple to use. The 50/30/20 budget rule requires only simple math, and can be adjusted month to month if your income changes.
- Not too restrictive. With 30% allocated toward fun expenses, you won’t feel like you’re doing without.
- Can be adjusted. Since it works with percentages, it’s easy to adjust your budget if you have a change in income.
- Doesn’t take into account your expenses. For example, if you have an exceptionally high mortgage, it can be challenging or impossible to stick to the 50/30/20 rule.
- The percentages are fixed. If saving is a priority, you might want to dedicate more money toward your savings accounts. But this budget is pretty prescriptive in that the percentages are fixed.
- The ratio may not suit your needs. If you’re working toward a goal, like saving up for a home or working to pay off debt, the allocations may not be the best match for you. You might want to choose another budget method that aligns with your financial needs.
2. Zero-Based Budget
Zero-Based Budget: Who It’s Best For
Having a zero-based budget means every dollar is accounted for in your budget. At the beginning of the month, you’re essentially starting at zero, and by the end of the month, you should have all your funds allocated. If you have any money left over, a zero-based budget plan would have you contribute toward savings, leaving you with zero dollars to start the next month. It can be more time-consuming than other budgets, and you’ll need to plan out each month’s expenses in advance to make it work.
Zero-Based Budget in Practice
To start a zero-based budget, you’ll look at your expenses versus your total income at first. Say you need to pay $1,500 in rent, and you expect to pay a total of $900 for necessities and wants, and you’d like to contribute $200 toward your retirement account. That means you’ll need to earn $2,600 for your budget to equal zero.
GETTING STARTED WITH THE ZERO-BASED BUDGET
Before getting started, you’ll need to look at your typical expenses and think about any goals you have for saving. Then, you can use your last month’s income as a guide for how you’ll cover your expenses and break even. After you determine how much you’ll need to break even, you can start tweaking your expenses if you want to save or pay down debts.
Pros and Cons
The zero-based budget is not the quickest or easiest way to budget, but it can be an effective way to minimize costs and maximize your savings.
Key Takeaways
- Can be adjusted. Since you’re starting from zero each month and building out your budget, you have a lot of flexibility in how you decide to allocate your expenses. If your income changes, you can make adjustments.
- Keeps spending in check. You won’t be able to live beyond your means if you follow a zero-based budget. Every dollar has a purpose, so to stick to your budget you’ll need to be disciplined.
- Tracks spending each month. You’ll see exactly how much you’re spending since you’re redoing your budget each month and looking at last month’s financial picture. You can really start to see patterns over time and find ways to minimize spending.
- Process can be extensive. Unlike other budget methods like the 50/30/20 rule, you’ll have to start over each month to create your zero-based budget. If you don’t have a lot of time to spare, you might want to pick another method.
- Can be difficult to predict expenses. Since you are drawing up your budget in advance, it doesn’t specifically account for unexpected expenses that can arise. Even if you dedicate a portion of your money toward emergencies, you won’t know how much and if it’s enough to stick to your zero-based budget.
- It can be complicated. If you’re just starting out with your budget, you might not want to begin your budgeting with a zero-based budget. Until you get the hang of budgeting, you might want to start with a simpler system to make things easy for yourself.
3. Envelope Budget
Envelope Budget: Who It’s Best For
An envelope budget is a visual way of budgeting. You’ll have several paper envelopes labeled with your necessities, wants, savings and other categories. You’ll put a certain amount of cash into each envelope to spend or save as you choose. When you make a purchase, you’ll draw from the corresponding envelope to meet your budget. Although it may seem like an old-school method, the envelope budget has had a recent resurgence on TikTok.
Envelope Budget in Practice
Say you have $2,000 for the month. You could put $900 into an envelope for your rent, $100 for groceries, $200 for wants, $500 for savings and $300 for transportation costs. When you want to buy a new shirt that costs $50, you will take the cash out of your wants envelope, leaving you with $150 for wants for the remainder of the month.
GETTING STARTED WITH THE ENVELOPE BUDGET
Like other budgeting strategies, you’ll need to stay organized about your expenses to make the envelope budget work. You’ll also need to have the cash in hand in advance to spend for the month or whatever period you decide to base your budget around. It’s helpful to look at your typical expenses and calculate how much income you’ll earn during this period to see how you can distribute your money.
Pros and Cons
The envelope budgeting strategy can be effective, but not for everybody. Certain factors may make it a hit or a miss for you, depending on how you make purchases and your payment schedule.
Key Takeaways
- A physical method. By physically seeing the cash leave your envelope, you can be aware of how much you’re spending. In turn, this can help you be more frugal.
- Simple to use. An envelope budget is one of the more straightforward budgeting methods to follow. You won’t need to do any math or calculations, and it can simplify spending for a family, for example.
- Helps prevent debt. Because you’re paying for expenses in cash and not charging them, you won’t rack up interest charges or take on debt. This method can be helpful if you’re trying to reduce your credit card use.
- You must use cash. If you primarily make electronic payments through your debit or credit card, this method may not be for you. It also requires you to carry cash, which not everyone prefers to do. While you could make a digital payment and then take the cash out of the envelope, this requires an extra, time-consuming step.
- Not a digital method. If you prefer to track your spending on your phone or computer, this method may not work with your lifestyle. You’ll have to have paper envelopes on hand and like working with cash.
- Time-consuming. You’ll need to have the cash withdrawn in advance and make time to put it in each labeled envelope. This method can be more time-consuming than some other budget options, not to mention you’ll need to have cash in hand at the beginning of each month.
4. Values-Based Budget
Values-Based Budget: Who It’s Best For
A values-based budget can be a loose term for spending on what you prioritize in life or what brings you happiness. It’s usually less focused on tracking every dollar and more on how you feel when you spend money, minimizing purchases that don’t feel fulfilling. It can be described as a way to spend more intentionally so you get the most from your spending.
Values-Based Budget in Practice
A couple decides that instead of buying material things, they’d rather spend their extra money on traveling internationally. So they might look at their expenses and see where they can transfer funds from spending on material goods to their travel fund. Upon implementing a values-based budget, they decide they can trim $150 from their clothing and personal care fund each month toward their travel savings account to start saving up for a big trip they want to take.
GETTING STARTED WITH THE VALUES-BASED BUDGET
You should think about what kind of purchases you value. What expenses are unimportant or don’t bring you happiness? Take a look at your typical daily spending to see where you can make cuts and adjustments to suit your values. Next, you can allocate a percentage or specific amount to spend on each category each month.
Pros and Cons
A values-based budget may not work for everyone, particularly those with limited incomes or debts. But it can be a freeing way to budget for people who want to feel good about how they spend their dollars.
Key Takeaways
- It’s not restrictive. A values-based budget gives you a lot of freedom to draw up your budget however you’d like. You won’t focus on tracking every expense or meeting a certain threshold each month; instead, it allows you to take a broader view of your spending.
- Allows you to manage spending. When prioritizing your values, you may find it easier to avoid spending on autopilot or on things that don’t bring you joy or fulfillment. It's an intuitive way to cut costs.
- Helps you reach your goals. By getting clear in your mind about what it is you want, you might be able to reach your financial goals sooner because you have renewed focus.
- Can be difficult to do on a limited income. If you live paycheck-to-paycheck, you would probably find it difficult to spend on things you value when bills and necessities probably come first. It can also be challenging if budgeting for a family since you have many priorities and values connected to your spending.
- Not as detailed as other plans. Other budgeting methods are better for tracking every expense and staying super organized with your finances. The values-based budget can be a looser approach to budgeting that won’t work for all.
- May not facilitate debt repayment or saving. If you have student or credit card debt, paying it off may not be at the top of your wants list. This method may not be conducive to meeting your financial goals or prioritizing repayment.
5. Pay-Yourself-First Budget
Pay-Yourself-First Budget: Who It’s Best For
A pay-yourself-first budget means you immediately set aside money for savings when paid. Then, the remainder of your pay goes toward expenses. This can be a way to ensure you save money by automatically setting it aside, so you have less income off the bat to spend.
Pay-Yourself-First in Practice
Say your take-home pay is $5,000. You’d like to ramp up your retirement savings as you’re nearing retirement age. You could automatically deduct $2,500 from your paycheck to put into a retirement account. This would leave you with $2,500 to pay your expenses.
GETTING STARTED WITH THE PAY-YOURSELF-FIRST BUDGET
You’ll first need to decide how much you want to — and can — save each month. Look at your expenses to see how much is feasible to save before paying your bills. You’ll need to work out a plan that works for your financial situation and allows you to meet your savings goals.
Pros and Cons
Pay-yourself-first budgeting can be a great way to bolster your savings, but it may not suit every financial situation. You’ll need to be sure you can cover your bills after withdrawing your savings.
Key Takeaways
- An easy way to save. Since you automatically save at the beginning of the month, you don’t have to worry about going over budget and skimping on savings.
- Easy method. If you choose this method, you won’t worry about tracking every expense since spending for the rest of the month is pretty unrestricted as long as the money goes toward savings upfront.
- Quick process. You won't even have to think about transferring money each month after you decide on an amount to save and set up recurring transfers with your bank.
- Can be difficult for those on limited incomes. Dedicating a portion of income to savings up front can be difficult if you’re living paycheck-to-paycheck and don’t have extra money left over.
- Can facilitate spending too much. Since you’re dedicating money to savings up front, you might feel you can get a little spendy the rest of the month, derailing any attempt to keep spending in check and stay on track.
- Doesn’t help reduce costs. Since you’re dedicating money to savings upfront, you might feel you can get a little spendy the rest of the month, derailing any attempt to manage your spending.
Expert Insight on Successful Budgeting and Saving
MoneyGeek spoke with several financial professionals on how to create a successful budget, what pitfalls to look out for and tips on how to best manage your spending. Regardless of your income, savings or financial health, their tips can apply to all situations and budgets.
- Do you have any budgeting strategies you recommend?
- Why do you think many people struggle to stick to a budget?
- What are some ways to cut back on unnecessary spending?
- How should someone prioritize what they spend on versus how much they save?
Mel Young, CFP®Financial Advisor at Commas
Inbar MadarCEO and Business Consultant at M.I. Business Consulting
Melissa Griswold, Ph.D.Associate Teaching Professor of Finance at Trulaske College of Business, University of Missouri-Columbia
Niqua Tonya VanterpoolTravel Content Creator
Rachael Burns, CFP®Founder at True Worth Financial Planning
Christina Todd, CDFA®, CFP®Financial Advisor and Vice President at Cary Street Partners
Arwi Srithongrung KrizAssociate Professor of Public Administration at the University of Illinois, Springfield
Jordan Patrick, CFP®Financial Planner at Commas
Todd MoraProgram Manager at Western Michigan University
Artem MalininAssistant Professor at Florida Polytechnic Univeristy
Bethany McCamishCEO and founder of Bethany Works®️ Washington
Jennifer LeeFinancial Advisor, Author and Founder of Modern-Wealth
Kenneth Chavis IVCertified Financial Planner and Senior Wealth Manager at LourdMurray
Nate HansenCertified Public Accountant and Founder of SuperfastCPA
Danielle MiuraFounder of Spark Financials
Amy Rose HerrickChartered Financial Consultant at The Secret Profits
Resources for Budgeting
Many resources, including templates, calculators and apps, can help you reach your budgeting goals. Several are even free to download and use, while others are paid options.
- MoneyGeek’s Cost-of-Living Calculator: Get an idea of how much you’ll pay depending on your city using this cost-of-living calculator.
- Mint Free Personal Finance Software: Mint offers a budgeting app that links all your financial accounts and transactions.
- Federal Student Aid Estimator: If you’re a student, Federal Student Aid of the Office of the U.S. Department of Education offers this estimator to help you set a budget on the financial aid you may receive.
- Personal Capital’s Personal Finance Software: Personal Capital by Empower offers personal finance tools and software to see your financial accounts in one template.
- Quickbooks Business Expense Tracking: If you have a business, Quickbooks offers accounting and business expense reporting software to help you manage your business’s assets and expenses.
- Let It Save: Your Ultimate Holiday Budget Plan: Sticking to a budget can be particularly tough around the holidays, but this guide helps you ground your spending.
Budgeting Apps
Want an easy way to budget? These apps can help you plan and stick to your budget, and they’re convenient to use.
- Honeydue: This budgeting app can be particularly helpful for couples managing their money together.
- Goodbudget: Families can sync and share their budgets to keep track of multiple expenses.
- EveryDollar: If you struggle to remember payment deadlines, EveryDollar lets you set due dates for all your bills.
- PocketGuard: Another popular app that helps you stay accountable for your spending.
- Pylon: This resource is a paid option designed to help personal and business users track their monthly budgets.
- Monarch: Monarch offers a beta feature that provides advice for your individual financial situation from financial planners.
- Simplifi: Simplifi by Quicken offers insights into your spending to keep you on target.
About Cheryl Wagemann
Cheryl Wagemann is a contributing writer at MoneyGeek, with over seven years of experience in digital and print media. She has covered topics on economics and banking for The Balance and was the shopping editor at Finder.
Wagemann earned her bachelor's degree in English from Montclair State University.
sources
- MoneyGeek. "The Biggest Financial Stressors for Americans with Debt During COVID-19." Accessed May 18, 2022.
- Intuit MintLife. "40 Financial Statistics for 2021." Accessed May 5, 2022.
- Intuit MintLife. "Survey: 65% of Americans Have No Idea What They Spent Last Month." Accessed May 5, 2022.
- Young Consumers. "Materialist values, financial and pro-environmental behaviors, and well-being." Accessed May 5, 2022.