What is a budget and how do you create one?
December 6, 2022 5 min read
Learning how to manage your money responsibly is important. But it can sometimes be hard to keep track of where your cash is going—and how much you actually have to cover your expenses. This is where making a budget can come in handy.
Learn more about what a budget is and how you can create one that aligns with your financial goals.
- A budget is a plan that details income and expenses to help support financial goals, money management and more.
- Three popular budgeting methods for personal finances are the 50-30-20 method, the zero-based method and the envelope method.
- To make budgeting easier, it can help to put aside the money you want to save as soon as you’re paid, automate your bill payments and cut back on unnecessary spending.
Basic budgeting involves figuring out how much money you have coming in and where that money is going—and then choosing how best to manage that money.
- Income: Income is easy enough to identify. For most people, it comes from their job. But other sources, like benefit payments or child support, might be included too.
- Expenses: When it comes to expenses, there are a number of ways to classify them. You could look at essentials and inessentials, basically needs versus wants. Things like rent and food might be classified as needs. On the other hand, vacations or eating out might be considered wants. Looking at fixed and variable expenses might also help.
Once basic income and expenses are settled, there are different methods for deciding how to manage money. And budgets can also go a step further to incorporate other potential financial obligations, investments or goals.
What is the purpose of a budget?
Budgeting can also be an effective tool to help you live within your means and achieve more financial stability.
You can create a budget with pen and paper, with a digital spreadsheet or on a budgeting app. The Consumer Financial Protection Bureau also has a budgeting worksheet that might help you get started.
Having income and expenses written out can give you a clearer picture of your finances. And if you’re saving for something specific, like buying a house, planning a wedding or going on a vacation, you can use your budget to help you determine how much you can realistically set aside toward that goal.
Common types of budgets
There are several methods for budgeting that you can use to help stay on top of your finances. But here are three popular ones:
To put it simply, the 50-30-20 method of budgeting means you set aside 50% of income for needs, 30% for wants and 20% for savings, debt payments and investments. This can be a straightforward budgeting method for people who don’t want to have to create a detailed plan or account for every nickel.
When you use the zero-based method of budgeting, you put every dollar you take home toward a specific purpose. You may not always be able to anticipate how much you’ll be paying in expenses from month to month. But having a rough estimate of how much you’ll need to set aside can help you stay on track.
To use this method of budgeting, pinpoint how much money you need for things like rent, bills, groceries and other necessities each month—as well as how much you want to set aside for any extras. Then decide how much money you want to put into savings. Finally, once any money comes in, split it up according to each of the categories and amounts you decided on. At the end of each month, your income minus expenses, savings and any other categories should equal zero.
The envelope method
With the envelope budgeting method, you divide your income into categories, like bills and utilities, groceries and “fun” money, for example. Having an idea about income and expenses is especially important for this method because you determine how much money to allot to each category and put that amount in cash into physical envelopes. Or you can use a mobile budgeting app to organize your funds virtually instead of using actual envelopes.
Once you have your cash divided up, the money in each envelope is meant to be spent on that category alone. And once money in an envelope is gone, you’re done spending. The idea is to stick to spending only what you have on hand. If you’re going the online route, the same idea applies.
Here’s an example: Let’s say you have $200 in your groceries envelope. This means you have exactly $200 to spend on groceries. You don’t have to use the full amount, but you can’t go over $200 until you add more money to the envelope.
How to make a budget: 3 tips for effectively managing your money
Regardless of which budgeting method you choose, there are additional things you can do to make it easier to manage your money.
1. Pay yourself first
2. Automate your bill payments and savings
Another way to make it easier to stay on track with your budget is to automate your regular expenses.
Automating transfers into your savings, retirement or investment accounts can make it easier to build consistency into your budget.
And automating bill payments can help you track spending and avoid missing due dates.
3. Hold yourself accountable
A budget is only an effective tool if you stick to it. If you find yourself struggling to be consistent with it—or you’re sneaking in extra purchases—it might make sense to reevaluate your budget. It might also be worth taking a closer look at your spending habits and seeing if there are any areas where you can cut back.
Budgeting in a nutshell
Creating a budget for your personal finances can help you reach your spending and saving goals. It takes dedication and consistency, but the peace of mind that a budget can bring—plus the potential improvement in your financial stability—can make it worth it.
And if you’re looking to budget with a credit card, there are ways to do that too.