Knowing how to create and stick to a budget is important to your financial education and wellbeing, but many people go without a budget until they find themselves in financial trouble. But budgeting isn’t just for times of financial stress: a budget can help you save for future goals, and make sure your spending is aligned with your priorities, as well as prepare you for unexpected expenses. We’ll cover the basics of budgeting below, as well as naming some tools that can make following a budget easier.

A Beginner’s Guide to Building a Budget

The first step to creating a budget is determining which tools you’ll use to create your budget and track your spending. Pen and paper are always an option, and there are even physical budget planners if you’d prefer a well-structured approach. Many people use templates in Excel or Google Sheets with built-in formulas to build and maintain their budgets. If you’re more tech-savvy or prefer a more hands-off approach, there are many apps available that can track your spending for you, categorize your expenses, and even recommend where you can cut back spending. As with any app connected to your finances, be sure to research and choose a reputable app with appropriate security and privacy. Mint by Intuit is a free personal finance app with many options for customizing spending categories, financial goals, and even estimating debt payoff timelines.

Every budget begins with a thorough accounting of income and expenses. Your net income is the foundation of your budget. Find your net income by calculating total wages or salary minus deductions for taxes and employer-provided programs such as health insurance. For freelancers and business owners with variable income, find your average monthly income for the past 6-12 months to estimate your net income.

Next, you’ll need to categorize your expenses. Bank statements and credit card statements are a great place to start. A good way to start thinking about your expenses is fixed expenses versus variable expenses, and necessities versus wants. Fixed expenses are any predictable monthly or yearly expenses such as rent, mortgage payments, loan payments, or car insurance. Variable expenses include groceries, utility bills, and discretionary spending on entertainment, clothing, and more. Credit card and bank statements can help you to get a big-picture look at what your money is going towards. 

Your next step is to identify realistic long-term and short-term goals. Are you looking to save up for a down payment on a home? Pay down existing debt? Put aside money for a vacation? Identifying goals and being able to estimate when you might reach them is a huge motivator to spend wisely and will help you stick to a budget when the urge to impulse-spend arises.

Now with your income, expenses, and savings goals in mind, it’s time to make a plan. If you’re new to budgeting, the 50/30/20 rule is a great plan to start with. Under the 50/30/20 rule, you should budget for 50% of your net pay to cover needs, 30% to cover wants, and the remaining 20% towards savings and debt repayment. The easiest expenses to restrict or set limits on are going to be your “wants.” For example, you might find it worth cutting back on streaming services to dedicate more income to your retirement fund. Fixed and necessary expenses require a bit more research to adjust, such as shopping around for the most affordable car insurance, or consolidating debt if you can find a lower interest rate.

While the 50/30/20 rule is a great plan to start with, you may prefer a more aggressive budget that restricts spending in favor of paying down debt earlier (thereby paying less interest over time). Think of the 50/30/20 rule as a starting point and adjust the percentages to match your short and long-term goals and priorities.

However you choose to plan your budget, be sure to schedule monthly check-ins to see if you’re on track. Your future financial security will be well-worth the time to monitor and adjust your spending wisely.

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