Read time: 4 to 5 minutes
Creating a budget is a good start to getting your finances organized. Without one, it can be hard to decide how much you can afford to spend, where you can save money, and how to meet your financial goals.
What is a budget and why should I have one?
It's your most effective tool for achieving your short-term financial goals, like reining in spending or paying your bills on time. By taking care of the here and now, you'll be better positioned to tackle your long-term goals, too, like saving for a house or planning for retirement.
Making a budget can help you feel more in control of your money and is a great way to reduce financial stress.
One 2021 survey done in the U.S. found that those who kept a budget were more likely to know how much they spent last month and were less likely to splurge on something that hurt their ability to pay bills.*
What are the basics of budgeting?
And it doesn't have to be complicated to be effective.
There's no one right or wrong method. The best budget is the one you'll use and stick to. Find a spending plan that fits your lifestyle and values.
How do I choose a budgeting method?
Sitting down and planning out a budget can seem overwhelming, but don't worry. If you need a little guidance, your answers to 2 questions can help you narrow down the budgeting strategy that might work best for you:
- Is tracking your spending important to you?
Yes. Consider zero-based budgeting or the 50/30/20 rule.
No. Consider the envelope method or pay yourself first.
- What is your current priority?
Start saving money. Consider zero-based budgeting or the envelope method.
Boost current savings. Consider the 50/30/20 rule or pay yourself first.
Let's dig into the details of each method.
The envelope method
With this method, you'll need to have cash on hand and use physical envelopes. If you would prefer to go digital, many banks will allow you to create digital wallets to track your spending online, or through a mobile app. The idea behind the method remains the same, though. To use this method:
- Write your monthly expenses on blank envelopes categorized by type—such as housing, utilities, car payment, groceries, credit card debt, savings, and entertainment.
- When you get paid, decide how much money you'll need for each expense and put that amount of cash in each envelope.
- Spend only what's in the envelope for that category. If you decide to spend more in a given category, you'll have to take money from another envelope.
- If you’re using physical envelopes of cash, be sure to keep them in a safe place!
This method is a simple way to organize your money.
Zero-based budgeting
A zero-based or zero-sum budget encourages you to think about the importance of every single expense each month and where you can cut costs if needed. With this method, your monthly income minus your monthly expenses and savings should equal zero. To use this method:
- Start by figuring out your total income each month.
- Next, make a list of all your expenses to get an idea of how much you spend each month.
- Then, group your expenses by type, like bills you're required to pay and things you like to spend money on. Be sure to include a category for savings goals and debt payments, if needed.
- The last step is to divide up your income and assign every dollar to a category until there's no money left over.
If you find that you don't have enough money to cover each category, you might be spending more than you make. In that case, take another look at the dollar amount you've dedicated to each category and see where you can reshuffle or cut back.
You can keep your budget consistent each month or change it up, depending on what you've got going on. Maybe you're going on vacation next month and want to save a little extra, or you want to start putting money aside for holiday gifts. Zero-based budgeting requires a hard look at exactly where your money is going each month, and it allows you to make adjustments throughout the year.
This approach takes more time and discipline, but it can work well if you prefer to keep a close eye on your finances.
Pay yourself first
Think of your savings like a bill that you're required to pay each month—an expense you have to take care of before you do anything else. This way, you're ensuring that you meet your savings goals while taking care of your other expenses.
To make this method easier, you can set up automatic monthly transfers from your paycheck into your savings account to help you stay disciplined.
50/30/20 rule
About 30% of your income should go to "wants"—the extra things that make life more enjoyable but aren't essential, like dinner and a movie, a gym membership, or concert tickets.
The last 20% of your income should be dedicated to savings and debt payment, like your retirement account, credit card payment, and emergency savings.
Remember, 50/30/20 is just a suggested allocation. You can adjust it according to your financial goals and what makes most sense for you. For example, if 50% of your income doesn’t cover your living expense and bills, you may need to increase your “needs” to 60% and lower your “wants” to 20% of your income.