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Budgeting 101 How to Budget Money
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Budgeting 101: How to budget money
Divide your income among the necessities, wants, savings and debt repayments, by 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 holds a bachelor's level degree in journalistic studies from Auburn University and a master's in education from Georgia State University. Before coming to NerdWallet, she worked for daily newspapers, MSN Money and Credit.com. Her work was featured in The New York Times, The Washington Post, the Los Angeles Times, MarketWatch, USA Today, MSN Money and many other places. Twitter: @BeverlyOShea.
and Lauren Schwahn Lead Writer | Personal finance and Lauren Schwahn Lead Writer credit Lauren Schwahn is a writer at NerdWallet who covers debt, budgeting and money-saving strategies. She is a contributor to the "Millennial Money" column for The Associated Press. Her work has also been highlighted by USA Today, MarketWatch and more. Lauren holds a bachelor's degrees in historical studies from her home at the University of California, Santa Cruz. She is located at San Francisco.
Updated Dec. 2, 2022
Editor: Kirsten VerHaar, the Senior Assisting Editor eBay, Yahoo! Kirsten VerHaar is an editor of personal finance, with an English literature degree from the University of Colorado Boulder. In her previous roles, she was a lead editor with eBay and was in charge of the writers team that produced coverage for eBay's content team across the globe. She also wrote for Yahoo. In the years since she joined NerdWallet at the beginning of 2015 she has covered subjects as diverse as vacuums (yes it really is) budgeting, as well as Black Friday.
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If I have of an amount of say $2,000 per month, how can pay for accommodation, food and insurance, health care as well as debt repayment with no running out cash? That's a lot to cover with a small amount and this is a zero sum game.
The best solution is to prepare an appropriate budget.
The term "budget" refers to a plan for every dollar you have. It's not magic however it does provide freedom in finances and living without stress. Here's how to setup and then manage your budget.
How to budget money
Calculate your monthly income and then choose a budgeting strategy and keep track of your performance.
Try the 50/30/20 rule as an easy .
Up 50 percent of your income to cover your needs.
Leave 10% of your earnings for wants.
Commit 20percent of your income to savings and the repayment of debt.
Track and through regular check-ins.
Understand the budgeting process
Figure out your after-tax income: If you get regular pay, the amount you receive is probably it, but when you are able to take automatic deductions for savings, a 401(k), savings, and health and life insurance, add those back in to give yourself a true view of your savings as well as expenditures. If you have other types of income, for instance you earn money through other jobs -- you should take out anything that lowers it, such as business and tax expenses.
Make a plan for your budget The budget should cover all your requirements and certain desires and -- this is key -- savings for emergencies as well as the future. examples include the envelope system as well as an all-zero budget.
Monitor your progress: Keep track of your expenses or usage .
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 effort on your part. An accountability partner or online support groups can assist to hold you accountable for decisions that go against your budget.
Manage your budget: Your spending habits budget will evolve over time, so actively manage your budget by revisiting it frequently, maybe every quarter. If you're having difficulty sticking to your plan, consider 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 what your personal take-home (net) amount, then take a pulse on your current spending. Then, follow the 50/30/20 rule: 50% of your requirements, 30% towards wants , and 20% towards the savings account and loan repayment.
How do you maintain your budget?
The key to keeping your budget is to keep it keep it up to date so you have a clear image of where your money is going and where you'd like it to be going instead. Here's how you can get started:
1. Check your account statements and categorize your expenditures.
2. Keep your tracking consistent.
3. Find a room for improvement. The ability to budget for free can be a boon.
How do you figure out your budget?
Begin with a financial self-assessment. Once you've established where you are and what you want to accomplish, pick a one that is suitable for your needs. We suggest the 50/30/20 method, which splits your income across three major categories 50 percent is devoted to the necessities 30 percent goes to wants and 20% goes to savings and debt repayment.
Try a simple budgeting plan
We recommend the popular 50/30/20 plan to . It is a budget that allows you to spend about 50 percent of your tax-free dollars on essentials, but no over 30% for wants and at a minimum 20% of your saving and repayment of debt.
We like the ease of this approach. Over the long term, someone who follows these guidelines will have a manageable debt, the ability to indulge on occasion, and savings to pay unplanned or irregular expenses , and then retire with ease.
The budget is 50/30/20.
Learn how this budgeting approach applies to your budget.
Monthly after-tax income Include your take-home earnings and add back in any payroll deductions in health coverage, 401(k) donations and automatic savings.
The numbers you have for your 50/30/20:
Necessities $0
Wants Zero
Savings and debt repayment $0 Have you identified your "want" categories?
Track your monthly spending trends to break down your needs and desires.
Up to 50% of your earnings for the needs of your family
Your requirements -- approximately 50 percent of your income after tax -- should include:
Groceries.
Housing.
Basic utilities.
Transportation.
Insurance.
Minimum loan payments. Anything beyond the minimum goes to the savings and debt repayment category.
Children's care or any other expense that you will need to cover in order to work.
If your absolute necessities exceed the mark of 50, you may need to tap into the "wants" section within your budget to last a few days. It's not an end-of-the-world scenario however, you'll need to alter your budget.
Even if your needs fall under the 50% cap Revisiting your fixed expenses often is a good idea. You may find a , an opportunity to or an opportunity to . This leaves you with more options to work with elsewhere.
Leave 30% of your earnings to be used for needs
It can be a challenge. It is generally true that needs are essential for you to live and work. The most common needs are dinners out, gifts, travel and entertainment.
It's often difficult to decide. Are spa-related restorative visits (including ) a want or a necessity? Are organic foods a good option? The choices vary from person to person.
If you're eager to get out of debt as fast possible, then you could think that your needs can wait until you've got some savings and your credit is in control. But your budget shouldn't be so austere that you can never buy anything just for fun.
Every budget needs flexibility -- perhaps you didn't remember an expense or one was more expensive than you expected -- or you have some cash to spend however you like. If you don't have money for entertainment, you'll be less likely to stick to your budget.
Commit 20percent of your income to savings and debt repayment
Utilize 20 percent of your earnings after tax to save something for unexpected expenses, and put aside money for the near future, and repay the debt. Always think about the bigger financial picture; that may mean two-stepping between debt repayment and savings to meet your most pressing goals.
Priority No. 1 is a first-aid emergency fund.
Many experts recommend you try to build up several months of basic living expenses. We recommend starting with a minimum of $500 -- enough to cover any small emergency as well as repairs, and then increase your budget from there.
You can't get out of debt without knowing how to reduce the amount of debt you incur each occasion that something unexpected occurs. It's also easier to sleep with an insurance policy for your finances.
Priority No. 2 is getting the employer match on your 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 offers a match, contribute at least the amount necessary to get the maximum. The match is only free.
Why is it that we give securing an employer match a higher priority than debts? Because you won't get another chance to win this much tax-free money, free cash as well as compounding interest. You have a better shot at creating wealth by getting into the habit of regularly recurring long-term savings.
You won't have a second chance to capture the . Every $1,000 you don't put aside in your 20s could be the equivalent of $20,000 less .
Priority No. 3 is a toxic loan.
After you've secured an investment match for the 401(k) If it's you're able, tackle the toxic debt in your life including high-interest credit cards as well as individual and payday loans and title loans and rent-to-own payments. All carry interest rates so high that you will be paying back two or three times what you borrowed.
If one of the following situations apply to you, consider possibilities for solutions, which could include bankruptcy or
It's impossible to pay off the debt you don't have to pay -- credit cards medical bills and personal loans -- in five years, even with drastic reductions in spending.
Your total unsecured debt equals the greater of 50% or more of your income.
Priority No. 4. This is also saving for retirement.
Once you've knocked off all debts that are toxic, the next task is to get yourself on track for retirement. Try to keep 15% or more of your gross income, which includes the company match if there is one.
If you're young, think about when you've gotten the match from your employer. After you've reached the contribution limit for the IRA you can go the 401(k) to 401(k) and increase the amount you contribute there.
Priority No. 5 is, again, your emergency savings.
Regular contributions can allow you to accumulate three to six months worth of expenses for living. It isn't advisable to expect constant progress because emergencies happen, and that's when you should pull money from this fund. Just focus on replacing what you use and increasing your use over time.
Priority No. 6 is repayment of debt.
These are payments beyond the minimum required to .
If you've already paid off your most toxic debt then what's left are lower-cost, tax-deductible debt (such as your mortgage). Consider these to be dealt with when the primary goals listed above are covered.
Any wiggle room you have here comes from the money available for desires or the savings you make on your essentials but not your emergency savings and retirement savings.
Priority No. 7 is you.
Congratulations! You're in a great situation -- really great position -- in the event that you've created your emergency savings account, cleared the toxic debt, and are saving away 15% towards a retirement nest egg. You've built a habit of saving money that provides you with immense financial flexibility. Don't give up now.
Consider saving for irregular expenses that aren't emergencies, such as the replacement of your roof or next automobile. These expenses will happen regardless of what they are, so it's better to save money for them rather than take out a loan.
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About the authors: Bev O'Shea was a credit editor at NerdWallet. Her work has appeared in publications such as the New York Times, Washington Post, MarketWatch and elsewhere.
Lauren Schwahn covers consumer credit and debt at NerdWallet. The work she has done was featured by USA Today and The Associated Press.
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