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Budgeting 101 How to Budget Money
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Budgeting 101 How to budget money
Divide your earnings between savings, needs, and debt repayments, using the 50/30/20 budget.
By Bev O'Shea personal finance writer | MSN Money, Credit.com, Atlanta Journal-Constitution, Orlando Sentinel Bev O'Shea is a former NerdWallet authority on consumer credit, scams and identity theft. She has a bachelor's degree in journalistic studies from Auburn University and a master's in education from Georgia State University. Before coming to NerdWallet she worked for newspaper publishers, including daily ones, MSN Money and Credit.com. Her work has been featured in The New York Times, The Washington Post, the Los Angeles Times, MarketWatch, USA Today, MSN Money and other publications. Twitter: @BeverlyOShea.
and Lauren Schwahn Lead Writer | Personal financial, credit Lauren Schwahn is a writer at NerdWallet who covers budgeting, debt and money-saving strategies. She is a contributor to the "Millennial Money" column in The Associated Press. Her work has also been highlighted in USA Today, MarketWatch and other publications. Lauren holds a bachelor's education in the field of history at The University of California, Santa Cruz. She is located within San Francisco.
Updated Dec. 2, 2022
Edited by Kirsten VerHaar, the Senior Assigning Editor eBay and Yahoo! Kirsten VerHaar is an editor for personal finance. She holds an English literature degree from the University of Colorado Boulder. In the past, she was a lead editor at eBay and was in charge of a team of writers who created coverage for the company's global content team. She has also written for Yahoo. Since she joined NerdWallet since 2015 she's covered topics as wide-ranging as vacuum cleaners (yes it really is) budgeting, as well as Black Friday.
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If I'm able to make about $2,000 per month, how do pay for food, housing, insurance, health care as well as debt repayment without running out of money? This is a huge amount to pay for with a limited amount, and this is a zero sum game.
The solution is to create an budget.
The term "budget" refers to a way to plan to make the most of every dollar you own. It's not magic however it does provide financial security and a lifestyle without stress. This is how you can set up and then control your budget.
How do you budget your money?
Determine your monthly income select a budgeting approach and track your improvement.
You can try the 50/30/20 principle for an easy .
Up half of your income for needs.
Reserve 30percent of the earnings for things you want.
You should commit 20% of your income to savings and debt repayment.
Track and check-ins regularly.
Learn about the budgeting process
Determine your tax-free income after taxes If you earn regular pay, the amount you receive is probably it, but if you have automatic deductions for such things as a 401(k), savings as well as life and health insurance, you can add them back in to give yourself a true image of your savings and expenses. If you earn other kinds of income -- perhaps you earn money through side gigs -- remove anything that decreases the amount, like taxes and business expenses.
Select a budgeting strategy: Any budget must cover all of your needs, certain desires and -- this is key -- savings for emergencies and the future. examples include the envelope system as well as Zero-based budgets.
Track your progress: Record your spending or use .
Automate your savings: Automate as much as you can so that the money you've set aside for an exact purpose can be used with little exertion on your behalf. A partner in accountability or an online support group can help to hold you accountable for decisions that go against the budget.
Manage your budget: Your spending habits budget will evolve in time, so you must actively control your budget by reviewing it often, perhaps every quarter. If you're having difficulty sticking with your plan, try these tips .
Before you begin to create a budget
NerdWallet breaks down your spending and helps you figure out ways to save.
Frequently asked questions
How can you create a budget spreadsheet?
Begin by determining your take-home (net) income, and then take a pulse on your spending. In the end, you should apply the 50/30/20 principle: 50% for needs, 30% toward desires, and 20% for saving and repayment of debt.
How do you manage a budget?
The most important thing to do is keep your budget is to do it on a regular basis so you'll have an accurate picture of the direction your money is heading and the direction you'd like it be instead. Here's how to get started:
1. Check your account statements and classify your expenses.
2. Keep your tracking consistent.
3. Identify room for change. A free budget can help you budget more easily.
How do you calculate your budget?
Start with a financial self-assessment. Once you know where you are and what you'd like to achieve, choose a strategy which is a good fit for you. We recommend the 50/30/20 system that divides your earnings into three main categories 50% of your income is allocated to needs 30 percent goes to wants and 20% goes to savings and debt repayment.
Try a simple budgeting plan
We suggest the popular 50/30/20 budget to . It is a budget that allows you to spend about 50% of your after-tax dollars for necessities, not more than 30% on needs, and at least 20% on savings and debt repayment.
We appreciate the simplicity of this strategy. Over the long term those who follow these guidelines will be able to manage debt, room to indulge at times and savings to pay for irregular or unexpected costs and to retire with ease.
The 50/30/20 budget
Find out how this method of budgeting applies to your budget.
Monthly after-tax income Include your take-home earnings and include back any deductions made from your paycheck for health insurance, 401(k) contribution and any other savings accounts that automatically save you money.
Your 50/30/20 numbers:
Necessities $0
Wants to pay nothing
Savings and debt repayment $0 Do you know your "want" areas?
Track your monthly spending trends to determine your needs and wants.
You can set aside up to 50% of your income for needs
Your requirements -- roughly 50 percent of your income after tax -- should comprise:
Groceries.
Housing.
Basic utilities.
Transportation.
Insurance.
Minimum loan payments. Anything beyond the minimum goes into the savings and debt repayment category.
Child care or other expenses that you will need to cover in order to get back to work.
If your absolute necessities exceed the mark of 50 You may have to dip to the "wants" portion in your spending plan for a few days. It's not an end-of-the-world scenario, but you'll have to alter your budget.
Even if you're under the 50% cap, revisiting these fixed expenses occasionally is smart. You might find an opportunity to or an possibility to . This leaves you with more options to do with other.
Leave at least 30% of your earnings to be used for needs
It can be a challenge. However, in general, the needs you require are vital to live and work. Common needs include dining out as well as gifts, travel, and entertainment.
It's sometimes difficult to make a decision. Are spa-related restorative visits (including ) something you want or a requirement? What about organic grocery items? Individuals' choices differ from person.
If you're looking to eliminate debt as quickly possible, you may decide that your desires can be put off until you've saved or you have your financial obligations in control. But your budget shouldn't be tight that you'll never spend money just to have fun.
Every budget should have room for flexibility -- perhaps you've forgotten about the cost or it was higher than you thought -- or you have some cash to spend as you wish. If there's no money to spend on enjoyment, you'll be less likely to stick with your budget.
You should commit 20% of your earnings to savings and debt repayment
Make use of 20 percent of your earnings after tax to put something away to cover the unexpected, or save for the future and repay debt. Make sure you think of the bigger financial picture; this could mean that you have to switch between savings and debt repayment to accomplish your most pressing objectives.
Priority No. 1 is an emergency starter fund.
A lot of experts suggest you attempt to accumulate a few months of bare-bones living expenses. We recommend starting with an of at least $500 -- enough to cover minor emergencies as well as repairs, and then increase your budget from there.
You won't be able to pay off debt without knowing how to not incur more debt each when something unexpected happens. It's also easier to sleep in the knowledge that you have an insurance policy for your finances.
Priority No. 2 is to get the employer match to the 401(k).
First, you need to get the money that is easy. For the majority of people, this means tax-advantaged accounts such as the 401(k). If your employer provides matches, you must contribute at least enough to reach the maximum. It's free money.
Why is it that we give securing the employer match as a higher priority over debts? Because you'll never get another chance like this one to get free money, tax breaks and compound interest. In the end, you'll will have better chances of creating wealth by getting into the habit of regular long-term savings.
There's no second chance to make the . Every $1,000 you don't put aside when you're in your 20s, it could mean more than you've got .
Priority No. 3 is a toxic debt.
If you've found a match on the 401(k) If it's you have it, take on the toxic debt in your life such as high-interest credit card debt, individual and payday loans, title loans and rent-to-own payments. All carry interest rates such that you'll end up repaying more than three times the amount you borrowed.
If one of the following situations applies to you, consider options for , which can include bankruptcy or
It's impossible to pay off your unsecured debt -- credit cards, medical bills and personal loans -- within the next five years, even when you make severe spending cuts.
Your total unsecured debt equals half (or more) of income.
Priority No. 4 is, as always, saving to retire.
After you've eliminated all debts that are toxic Next step is to get you on the right path to retirement. Make sure you reduce your expenses by 15% on your total income, including the company match if there is one.
If you're young, think about after you capture the match from your employer. When you've reached the limit of contributions to the IRA, return to your 401(k) and increase your contribution there.
Priority No. 5 is, once again your emergency fund.
Regular contributions can help you accumulate 3 to 6 months' cost of living expenses. Don't expect a steady progression since emergencies can occur and this is the time to withdraw funds from this account. Focus on replacing the items you are using and increasing your use over time.
Priority No. 6 is repayment of debt.
They are above the minimum requirement to .
If you've already cleared your most toxic debt then what's left are lower-cost, taxes-deductible loans (such such as the mortgage). Consider these to be dealt with when the primary goals mentioned above are accomplished.
Any flexibility you may have here is derived from the funds to be used for needs or the savings you make on your essentials and not from your emergency fund and retirement savings.
Priority No. 7 is yours.
Congratulations! You're in a great situation -- in a fantastic position, in the event that you've created an emergency fund, cleared excessive debt, and are stashing away 15% towards your retirement nest egg. You've built a habit of saving that gives you an incredible amount of financial flexibility. Don't give up today.
You should consider saving money for expenses that aren't emergencies, such as the replacement of your roof or next car. Those expenses will come no matter what, and it's better to save money for them rather than take out a loan.
Watch this video to learn more about Budgeting
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The authors' bios: Bev O'Shea worked as a writer for credit at NerdWallet. Her work has appeared in the New York Times, Washington Post, MarketWatch and elsewhere.
Lauren Schwahn covers consumer credit and debt for NerdWallet. Her work has been featured by USA Today and The Associated Press.
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