With good budgeting practices, you can simplify everyday buying decisions – and help you afford things and experiences you never thought you could before. It doesn’t have to use a lot of math or even take a lot of time. It’s mostly about getting a clear picture of your income, your spending habits and your personal priorities. Budgeting makes sure your money is helping you be more you.
How do I start a budget as a beginner?
To start budgeting right, take a look at everything money. It’s best to start on a small scale, taking only a month-long view and looking at your income and spending within a single month.
But the numbers should include everything, how much money you make each month and how much you spend each month as well as any debt payments, including student loans and credit cards. If you have any automated savings, you can account for those too.
Just make sure you’re accounting for all your spending, including your credit cards as well as any debit cards, online transfers and checks you’ve used.
The next step is assembling everything in one place: your income, spending, and savings. Some people use budgeting apps or software, others use simple spreadsheets, like Google Sheets or Microsoft Excel.
With your monthly spending and saving subtracted from your income, you’ve got a simple snapshot, a rough view of how much you spend and save.
Now take a closer look at your spending. Most checking accounts and credit cards lend a hand with this, assigning general categories to each purchase, like “health care” or “utilities” or “clothing” or “groceries.” Compare these categories. Do they reflect your priorities? For example, once you compile all your spending, you might see you’ve spent too much on “clothing” compared to “groceries.”
Use this simple snapshot as a mirror. Any surprises? Where do you see overspending? What could you cut? What can you do without, and what are you being too frugal about?
The next step is personalizing your budget. To help you make some tough choices, try following the 50/20/30 rule.
What is the 50/20/30 rule?
The 50/20/30 rule is a simple framework to help organize your priorities. The rule suggests the following breakdown for your monthly budget:
- 50% for essential needs or “must-haves,” like your rent or mortgage, food, transportation, and health care.
- 20% for savings and debt payments, including student loans and credit cards.
- 30% for nonessential spending or “like-to-haves,” such as entertainment, dining out, gym membership and streaming services.
Take a look at your spending, and item by item, see where each one falls in the 50/20/30 rule.
Items that qualify as essential should be pretty untouchable. Or, with a closer look, maybe they aren’t the most important things in your life. With the 50/20/30 rule, you can start to weigh the importance of different expenditures and apply your personal priorities, moving things around between the divides of the 50/20/30 rule.
What is a good budget?
A good budget reflects who you are, making sure you’re aware of your spending habits and that everything lines up with what’s important to you.
A good budget also prioritizes saving, starting with an emergency fund, which most pros recommend holding between 3 to 6 months of your monthly expenses. Now that you have a basic budget snapshot, you can see what you’ll need for a healthy emergency fund.
You don’t have to build it all at once, and you can use the 20% from the 50/20/30 rule to build yours. But don’t stop saving there. Even after you’ve filled your emergency fund, continue to prioritize that same level of saving month after month.
A good budget incorporates goal-setting too. If one of your goals is to work out more and dine out less, adjust your budget accordingly, spending more on a gym membership and less in restaurants.
If your monthly credit card bill is too high, try saving for purchases now, then spending when you have it, instead of relying on credit cards and their high interest rates. Set a savings goal for a big nonessential purchase, add to it regularly (even in small increments week by week) and pull the trigger when the money is at hand.
Setting goals can refine and personalize your budget. If you hope to buy a house, prioritize saving for a down payment – and make sure your savings each month will match your schedule. Use the same goal-setting technique for buying a car or planning a vacation. Try it for small goals too, like a special splurge or a weekend away.
Here’s a few tips for goal setting with budgets:
- Set attainable goals. Don’t work against your habits. If you have a significant goal, make sure you break it up into bite-sized goals for now.
- Remind yourself of your goals. Write them down. Don’t forget why you started a budget in the first place.
- Be flexible. Don’t be too hard on yourself for overspending in one area. With a budget, you can find other places to spend less and make up for it.
The 50/20/30 has a good track record. People at all levels of income can use it effectively, keeping your spending and saving in line as your income grows or shrinks.
But the rest is up to you. All of us spend our money differently. Some of us are so frugal that we really can’t pinch any more pennies. Others are exceedingly reckless with their spending. A good budget helps you see where you fall on the spectrum.
A budget can also help fight lifestyle creep. When you add additional income, making more money in month more than you did in the last, you can battle overspending by making sure you’re putting your money in the right place and all parts of the 50/20/30 divide grow at the same rate, in proportion to each other.
Here are some popular methods for budgeting in no particular order. You can use a combination of any or stick to just one. It’s your personal finances, after all.