The Ultimate Guide to Budgeting and Saving

Managing finances can be challenging. However, with the right tools and strategies, it’s possible to take control of your money and achieve your financial goals. 

In our third money series article, we will be exploring budgeting and saving after focusing on debt management in our previous article.

A middle-aged man sits at his dining room table with his young son teaching him about finances

One of the most effective money management tools is budgeting. By comparing your monthly income to expenses and taking stock of your finances, you can get a clear picture of your financial standing and make informed decisions about your spending.

Here’s how to make the often-dreaded budgeting process more manageable, with various tips on cutting back, saving more, and sticking to your financial goals. 

What is budgeting?

Budgeting is the act of comparing your monthly income to all of your monthly expenses. As you list each item, you get a chance to take inventory of your financial situation and create a snapshot of where you stand. You can use a budget for all of the following purposes: 

  • Discover if you’re overspending 
  • Find expenses you can cut or reduce 
  • Prepare for upcoming changes like a pay raise or rent increase 
  • Make a plan for how you’ll reach financial goals

Understanding budgeting  

Writing out your income and expenses can be an illuminating exercise. But there are many ways to leverage a budget even further and use it to improve your financial wellness.  

Many people only use budgets as a prompt to cut spending. But a budget can also show you what to increase or move around.  

For example, a budget can show you how much extra income you need to earn if money is tight. You can also use a budget to make trade-offs, like reducing one expense to put more money toward another. You might even look for positive expenses to add, like healthier groceries or visits to a medical specialist. 

How to budget and save effectively  

Want to make a budget you can stick to? There isn’t a one-size-fits-all guide to budgeting. However, experimenting with different budget management techniques could increase your chances of success. Here are a few methods to consider: 

  • 50/30/20 rule: Allocate 50% of your income for necessities (rent or mortgage, food, utilities, transportation, healthcare), 20% for savings or debt payments and 30% for non-necessities. 
  • Envelope method: Make an envelope for each of your budget categories. Place cash in each envelope that’s equal to your total monthly budget for that category.   
  • Zero-based budgeting: Assign a job to each of your dollars. If you have a surplus, you can stick to zero-based budgeting by assigning the money to extra debt payments, savings or investments like a 401(K). 

Strategies for saving money  

If your budget doesn’t include a plan to save money, you’re likely to spend every dollar you earn. Instead of leaving your savings to chance, build it into your budget.  

One strategy that can increase your capacity to save by diverting specific dollar amounts away from one budget category and into savings.  

For example, if you have a personal loan with a $200 a month payment, try adding $200 a month to your savings after the loan is paid off. If you receive a $500 a month raise, increase your savings (and not your spending) by $500 a month.   

5 tips for tackling budgeting and saving challenges  

Creating a budget can be simple, but sticking to it is hard. If you’ve got big obstacles to overcome, like breaking an impulsive spending habit or paying off large amounts of debt, use these budgeting tips to keep you on track:  

Focus on small goals 

Saving three-to-six months’ worth of income for emergencies may seem impossible. If it’s too daunting a goal, start with a smaller goal like saving one month’s rent or mortgage payment and build from there. 

Use the avalanche method for debt 

For high-interest debt (accounts over 6% APR) like credit cards, use the avalanche method to save money on interest charges and pay off balances faster. With this method, you use your budget surplus to pay extra on the account with the highest interest until the balance is paid off. Then you roll the payment toward the account with the next highest APR. 

Set up a sinking fund 

Do you have a goal on the horizon, like buying a car or moving to a new city? Use a sinking fund, which is a savings account or sub-account used for a specific expense, to gather the funds in advance rather than scrambling to cover the cost last-minute. 

Make it automatic  

Set up automatic deposits to your savings or investment accounts from each paycheck. By doing so, you pay your future self first and make it harder to spend your surplus.   

Get help  

Let friends and family know you’re working on a goal. Ask for their support and be proactive in suggesting free activities. If you’re looking for even more support, a certified credit counselor can review your budget and serve as your guide to budgeting by offering tailored tips and recommendations. Plus, they can help with overall financial literacy.   

Unlock financial freedom with budgeting 

According to a survey conducted by OnePoll, on behalf of Prosper Marketplace, only 43% of people regularly adhere to a budget. Just the idea of creating a budget can bring up stress, but following a budget requires commitment and even sacrifice.  

Fortunately, there are more tools than ever to make the job easy, including free budget apps, the option to set up automatic payments to savings and free credit counseling. If you’ve tried and failed at budgeting in the past, that doesn’t mean it’s not for you. It just means you’re closer to figuring out which tools work best.   

Frequently asked questions about budgeting  

How do you start a budget?   

You can start a budget by making a list of your monthly income and expenses. To make sure you don’t miss anything, take a look at your most recent bank statement, credit card statements and payment app transactions.  

Why is budgeting important?   

Budgeting is important because it gives you a snapshot of your financial health. Creating a budget can help you catch bad spending habits, prepare for upcoming expenses and create a spending plan to reach your financial goals. 

How can I stick to a budget and avoid overspending?   

There are several tricks and tools that can help you stick to a budget. One effective tool for budget management is setting up automatic deposits and payments.

You can set up automatic, recurring deposits to your savings or investment accounts to prevent yourself from spending every dollar you make. You can also set up automatic payments on your credit cards for more than the minimum amount due.

Written by Sarah Brady | Edited by Rose Wheeler

Sarah Brady is a financial writer and speaker who’s written for Forbes Advisor, Investopedia, Experian and more. She is also a former Housing Counselor (HUD) and Certified Credit Counselor (NFCC).

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