The Ultimate Guide to Budgeting

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.

• What Is Budgeting?
• 5 Good Reasons to Implement a Budget Now
• Practical Steps to Creating and Using a Budget
• How to Create a Budget With a Spreadsheet
• Budgeting Examples for Personal Finances
• Effective Budgeting Strategies and Methods

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.

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.

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.

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.

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 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.

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.

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:

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.