If you bring home $3,000 each month, how can you cover housing, food, insurance, healthcare, debt, and still have money for fun? With so much to manage, it’s easy to feel stretched.
The solution is to create a budget.
What is a Budget?
A budget is simply a plan for where every dollar you earn goes. It can give you more control over your money and reduce financial stress.
Steps to Budgeting Your Money
The budgeting process can feel overwhelming, but following these five steps can make it simpler.
Step 1: Determine Your After-Tax Income
For most people, after-tax income is the amount on their paycheck. However, if you have deductions for things like retirement, savings, or insurance, add those back to see a fuller picture of your income. If you earn additional income from a side job, be sure to subtract any taxes or business expenses.
Step 2: Choose a Budgeting System
Different budgeting systems work for different people. Any effective system should cover your needs, some of your wants, and allow you to save for future needs and emergencies. Examples of budgeting methods include the envelope system, the zero-based budget, and the 50/30/20 budget, which divides your income into three main categories.
Step 3: Track Your Progress
Keep track of your spending by recording it or using online tools. This helps you see where your money goes and if you’re overspending in certain areas. Cutting back in some areas could free up money for savings or paying down debt.
Step 4: Automate Your Savings
Whenever possible, automate your savings so funds go directly to designated accounts. If your employer allows it, set up automatic transfers from your paycheck to your savings, retirement, or investment accounts. Finding an accountability partner can also help you stay on track.
Step 5: Review and Adjust Your Budget
Your financial situation and priorities will likely change over time. Review your budget regularly, perhaps every few months, and adjust it as needed. If your initial budgeting method doesn’t work, try a different approach.
Setting Priorities in Your Budget
Deciding on your priorities is essential when budgeting. Should you focus on paying down debt, saving for retirement, or building an emergency fund? Here is a suggested order, from most urgent to least urgent, to help you decide.
Try a Simple Budget Plan: The 50/30/20 Budget
The 50/30/20 budget divides your income into three categories:
1. 50% for Needs
Needs are essential expenses that allow you to live and work, such as:
Groceries
Housing
Basic utilities
Transportation
Insurance
Minimum loan and credit card payments (additional payments go toward savings and
debt repayment)
Child care or other necessary expenses for work
If these essentials take up more than 50% of your income, consider using some of your “wants” budget for now. It’s also smart to review these expenses periodically for any potential savings.
2. 30% for Wants
Wants are non-essential items that make life more enjoyable. Examples include dining out, gifts, entertainment, and travel. Everyone’s view of “wants” versus “needs” can vary, so it’s okay if your list is a bit different.
If you’re focused on paying off debt, you may choose to delay some wants. Just be careful not to eliminate all discretionary spending, or you may find it hard to stick to your budget over time.
3. 20% for Savings and Debt Repayment**
Use this portion for your emergency fund, retirement savings, and paying down debts. Balancing between savings and debt reduction can help you meet immediate and long-term goals.
Frequently Asked Questions
How Do I Make a Budget Spreadsheet?
Start by calculating your after-tax income, review your current spending, and then apply the 50/30/20 rule: 50% for needs, 30% for wants, and 20% for savings and debt repayment.
How Do I Stick to a Budget?
The key to sticking to a budget is tracking your expenses regularly so you know where your money is going and where adjustments can be made. Start by checking your account statements, categorizing expenses, and keeping track consistently. Free online tools can make this easier.
How Do I Figure Out My Budget?
Start with a self-assessment to understand where you stand financially. Then choose a budgeting system that fits your goals and lifestyle. Many people find the 50/30/20 system effective, as it balances needs, wants, and savings.
