For many people, budget is a scary word.
A budget might seem like a complicated series of mathematical formulas and rules that silently judge your financial choices and limit your freedom.
In reality, a budget can be a simple list of your income versus your expenses. By taking the time to gather the numbers, you can get a better picture of where you stand now and find ways to change your finances for the better.
In This Article
How to create a budget that works for you
Budgeting can improve your finances. If you follow these tips on how to budget, you’ll have an easier time gathering your numbers and you may even find yourself more motivated to achieve your money goals.
1. Write down your financial goals
Budgeting can feel futile if you’re not working toward some kind of reward, whether it’s becoming debt free, buying a home or just taking a vacation. You can motivate yourself to spend less and stay on track by writing out specific things you want to accomplish in the next year, five years and beyond.
With that said, most people make mistakes when it comes to goal setting. According to a Gallup poll, financial goals are the second most popular type of New Year’s resolution. But at the same time, credit card debt is now at a record high, and a J.D. Power survey found that 30% of U.S. adults have less than $1,000 in savings.
If you want to move your goal from daydream to reality, try making it “SMART,” which is an acronym for specific, measurable, attainable, relevant and time bound. For example, if you want to save for a down payment on a new car, your SMART goal might look like this:
|Goal||Amount needed||Timeframe||Number of pay periods||Amount per pay period||Method|
|Car down payment||$10,000||1 year||26||$385||Automatic deposits to high-yield savings account each pay period|
2. Compare your income and expenses
If you can write down a list of all your monthly expenses and income, you can create a budget.
To make sure you don’t miss anything, review your most recent bank and credit card statements and payment app accounts. Make sure you don’t just include fixed expenses, but you add occasional expenses too, like birthday and holiday gifts, vehicle registration and back-to-school clothes.
Making this list can be illuminating, since it often reveals bad habits and money mistakes you weren’t aware of. For example, you might not realize that your $150 a week date night costs you $650 a month ($150 x 52 weeks in the year, divided by 12 months).
Once you have your list, your first concern should be ensuring your income exceeds your spending. Still, budget tracking can also be useful for the following:
- Assigning a job to each of your dollars, like paying off debt or investing in a retirement account (also known as zero-based budgeting)
- Assessing if you can afford an upcoming expense and, if you can’t, taking the appropriate steps to cover any gaps in your budget
- Catching bad spending patterns and taking action to curb them
- Determining how long it will take you to reach a financial goal and making adjustments to get there faster
3. Prioritize high-interest debt
Debt isn’t the most exciting goal to focus on, but it can be the most beneficial. That’s because high-interest debt—anything with an APR over 6%—can wipe out the money you earn on savings or investments.
If you have high APR accounts, like credit cards, payday loans and some other loans, try this method to pay them off faster:
- Make a list of all your debts, starting with the highest APR account first.
- Make the minimum monthly payment on each account but pay extra toward the first debt on your list.
- Once the first debt is paid off, roll the payment toward the next account on your list.
- Follow this pattern until all debt is eliminated.
If you’re struggling with multiple high-interest debts, it might be worth considering consolidating them into a single personal loan. This can help simplify your payments and make it easier for you to manage your finances.
By taking this step, you could potentially save money on interest payments and make progress towards paying off your debts more quickly.
4. Look for ways to cut back
When it comes to budgeting, making cuts can be challenging. However, it’s important to remember that the more you reduce your expenses, the quicker you’ll achieve your financial goals. Following these guidelines can help:
- Start with the big numbers: Look for ways to reduce the biggest expenses first. Sure, you can wring your hands over oat milk lattes, but you’ll probably make bigger changes by doing things like downsizing your car, getting on an income-based repayment plan for your student loans or switching to a different family cell phone plan.
- Make temporary cuts: Nobody wants to stop shopping or dining out forever, but you can probably go without those splurges for a while. If you’re not ready to eliminate a non-necessity, think about putting it on hold temporarily so you can jump-start your progress.
- Remember you’re human: If you squeeze every non-necessity out of your budget you might end up miserable, which can lead to bad financial habits like impulse spending. If you’re cutting back, make a plan to include leisure or entertainment as rewards for making progress on a goal, even if it’s just treating yourself to a movie night or spending a few dollars on your hobby each month.
5. Look for things to increase
Budgeting isn’t just about cutting back. Eliminating expenses can only take you so far if your income is limited. But if you focus on increasing your income, you can potentially increase your quality of life and achieve more financial goals.
If money is tight, try seeking a promotion, a raise or switching jobs. Make it an annual habit to raise your income. You can also brainstorm ways to bring in more money, like renting out a room or selling old equipment.
Increasing some expenses in your budget can pay back in spades, too. If your budget allows, consider spending more on these items:
- Groceries (instead of dining out)
- Medical care
- Physical fitness
- Life insurance
Use your budget as a roadmap
Creating a budget doesn’t have to feel like a form of punishment. Sure, a budget can force you to face things you’d rather ignore, but it can also give you a chance to start over.
Before gathering the numbers, picture yourself enjoying a dream vacation or waking up debt-free. When you work on your budget, remember that it’s a roadmap that leads to those goals.
Frequently asked questions about how to budget
What is budgeting, and why is it important?
Budgeting is the act of comparing all of your expenses to your income. By listing the numbers, you can get insights into your spending, see if you’re running a deficit and make choices that help you achieve your financial goals.
How can I manage my debt while budgeting?
You can manage debt while budgeting by incorporating a debt payoff plan into your budget. If you have discretionary income, budget to make extra payments toward your high-interest debt.
If you need further help, consider reaching out to a certified, nonprofit credit counselor to get personalized advice on how to budget and explore options like a Debt Management Program.
What is the 50/30/20 budget rule?
The 50/30/20 budget rule is a commonly recommended method for managing your expenses. To follow the rule, you allocate 50% of your take-home pay to necessities, put 20% toward savings or debt payments and spend up to 30% on wants.
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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