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Budgeting 101: Creating a Budget

Last Updated: August 18, 2022
8 min read

Key Points About: Creating a Budget

  1. Before you create a budget, figure out how much your monthly income is versus how much you pay in bills each month.

  2. There are different budgeting techniques to help people of all lifestyles pay bills on time and save money.

  3. Monitoring your account, setting automatic payments, and adjusting your budget can all help you meet financial goals.

Ready to take charge of your finances and work towards a financial future you’re excited about? Great. To get started, you’ll likely want to create a budget. The good news is you can tailor your budget to what works best for you.

The word “budget” may leave a sour taste in your mouth. Here’s the deal, though — creating a budget doesn’t have to be restrictive, nor does it mean you’re stuck eating rice and beans for dinner every night (unless you want to!). A budget is a simple tool you can use to tell your money where to go so you can create the life you want.

Simply put, a budget is a spending plan that accounts for your income, expenses and goals. It’s designed to serve as a roadmap for you to reach your desired destination. If you’re wondering how to create a budget, you’re not alone. At first glance, creating a budget can seem complicated, even overwhelming. But it doesn’t have to be. Your budget can be as simple or elaborate as you want. You can create a budget using pen and paper, a spreadsheet, or an app.

Learning how to budget money — yes, even for the first time — only involves a few simple steps, and you’re in charge every step of the way. Here’s how to get started.

Before you create a budget

1. Calculate your monthly income

Before you get fancy with budgeting templates or apps, it’s important to understand your monthly income. That is, the amount of money you bring in each month from a full- or part-time job, your side hustle, or another income source. If you don’t know how much you make each month offhand, check your paychecks from your employer, or any invoices you may have sent to clients, for example. For most people, their monthly income is fairly consistent. However, if you own a business, or work as a freelancer or gig worker (like driving for a rideshare or delivery service), your monthly income might fluctuate. If that’s the case, calculate your earnings over a few months to get an idea of your average earnings. Once you’ve calculated your monthly income, you’re ready for the next step in creating a budget.

2. Make a list of your expenses

Now that you know your monthly income, the next step in creating your budget is focusing on your expenses. Start with the following categories: housing, transportation, groceries, dining out, insurance, utilities, cell phone and fun. You may also consider monthly subscriptions, like streaming services, or other recurring expenses, such as getting your hair cut.

All you need to do at this phase is make a comprehensive list of your expenses. Think of it as information-gathering. There shouldn’t be any judgment, nor should you feel the need to eliminate or cut out anything right now. After you’ve compiled your expenses, however, you may decide to look more closely at your budgeting categories and potentially make adjustments where you feel they’re needed.

For an uber-simple breakdown of what your expenses could look like, consider the 50-30-20 rule for how to budget money. The 50-30-20 rule says that 50% of your income should go to necessities like housing, groceries, transportation, utilities and insurance. Next, 30% goes toward your “wants,” like dining out, travel, concerts and shopping. The final 20% should be allocated to long-term savings for retirement, or used to pay off debt. When you’re new to creating a budget, the 50-30-20 rule is a simple way to think about it.

Another easy technique is zero-based budgeting. Basically, that means you assign every dollar you earn to your expenses, savings or debt payments with nothing left over. Put another way, your income minus your expenses should equal zero by the end of the month. That’s why it’s called zero-based budgeting — essentially, every penny of your monthly income has a specific purpose. And no, that doesn’t include blowing it all on an impromptu shopping spree.

3. Plan for your goals and dreams

After you’ve listed your income and expenses, it’s time for the fun part — planning for your goals and dreams. The best part about creating a budget is it provides a framework for your spending that enables you to intentionally enjoy your life. Keeping your goals in mind makes it easier to stick to your budget, particularly if you are budgeting on a low income.

So, when it comes to budgeting for your goals and dreams, it’s important to consider what you hope to accomplish in the next one, five and even 10 years. When you’re thinking about how to budget money during this stage of the process, it’s important to consider any big-ticket items or experiences you might need to start saving for now. For example, if you want to buy a house in the next five years, you need to figure out how much you’ll need to save for the down payment and start setting that amount each month. Or perhaps you’re interested in redecorating your current home and you need a fund for new furniture. You’ll need to create a budget category for that. Similarly, if you have a tropical vacation in mind for next summer, then now is the time to start saving. Sometimes, these budgeting categories are called “sinking funds.” Essentially, these are a savings account where you set aside money each month for a one-time or irregular expense.

This may also be a good time to review your credit cards. Are you carrying a balance you want to pay off? Or maybe you need a credit card with rewards that better align with your goals? For example, if you’re trying to save extra money toward future travel, you might want to consider a cash back credit card that allows you to earn rewards while spending on everyday items like groceries or gas. Once you’ve made a plan to save for some of your longer-term dreams and goals, you’re ready to select a budget strategy.

From zero-based budgeting to the anti-budget: Choose your budgeting strategy

Now that you have a solid understanding of your financial picture, you get to choose a budgeting system that works for you. Keep in mind, there’s no right or wrong here. It’s all about what works best for you and which system aligns with your personality. Four of the most common budgeting strategies are zero- based budgeting, the 50-30-20 rule, the envelope method and line-item budgets:

Zero-based budgeting: The premise of this budget strategy is simple — each dollar in your budget is given a specific “job,” as mentioned above. If you earn $2,000 per month, for example, then you would budget to exactly $2,000 to spend, save or pay off debt. Zero–based budgeting tends to work well for people who like being very hands-on and involved with their money, since regular check-ins may be required throughout the month to keep this strategy on track.

50 30 20 rule: If you’re someone who’d prefer a “set it and forget it” approach to budgeting, this strategy could be a great fit. After allocating your income according to the 50-30-20 rule (as mentioned above) — 50% for necessities, 30% for things you want and 20% for saving or debt repayment — you’re good to go. Since you need to have a basic understanding of your general spending categories first, this budgeting strategy can take some time to set up. Once you have the basics down, though, the 50-30-20 rule is a pretty low-maintenance way to manage your money. Plus, you can rest easy knowing that you’ve set yourself up for financial success.

Envelope method: This budget strategy may work for you if you’re trying to reign in your spending or stick to a strict budget. Some people turn to the envelope system to keep their spending in check when they’re paying off debt, for instance. With the envelope method, you assign each category in your monthly budget (groceries, transportation, utilities, etc.) a specific amount of money. Then, you set aside that amount in a physical or digital envelope. Once each envelope is empty, you can’t spend any more money in that category until you replenish the envelope the following month. That’s why the envelope method works so well to help reduce overspending and stay on a budget.

Anti-budget: Not into tracking your spending or creating a budget with specific categories? This budget strategy may be a good choice for you. Instead of tracking your budget in categories, the anti-budget plan gives you the flexibility to set aside a specific percentage of your income to put towards savings or debt repayment at the beginning of each month. Then, you get to spend whatever is left over. The trick to making this budget strategy work is making sure you always have enough money set aside to pay for recurring bills and other non-negotiable expenses like housing.

Monitor your budget

Here’s the thing about budgeting — it’s a work in progress. Instead of waiting to find the perfect budget strategy for you, you can pick one and give it a go to see if it’s a good fit for you. As long as you have a basic spending plan in place and a clear understanding of your income versus your expenses, you’re off to a great start.

Set your money to save automatically

Once you’ve decided how much money to allocate to savings, automating the savings part of your budget means you’re less likely to spend the money elsewhere. If your employer offers an automatic deduction into a 401K plan, that’s a good place to start. You can also set up a direct deposit of a portion of your paycheck into a savings account.

Adjust your budgeting plan

Creating a budget is deeply personal, and your spending plan will often evolve over time depending on your needs and stage of life. The best way to approach creating and sticking to a budget for the long haul is to keep an eye on your strategy and make adjustments as your needs change.

Enjoy saving money

What’s the most important thing you can do today when it comes to learning how to budget? Just choose one of the strategies above and get started. Then you can enjoy the money you save (and the knowledge that you’re taking care of your financial future).

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