For many consumers, the cornerstone of a healthy financial life is a strong budget.
Not only does a good budget help ensure you have the money you need for necessities like food or rent payments, it enables you to use your income to lead a balanced life according to your goals.
“A budget is about helping you achieve and do the things you want,” Kyle Enright, president of Achieve Lending, says. “Goals could include everything from taking a vacation and buying a new TV to funding a child’s college education and retirement — and even making sure to have time to pursue a favorite hobby.”
Managing money by creating a budget empowers spenders to achieve their goals while maintaining their needs. Read on to learn how to create a budget — and stick to it.
What Is a Budget?
A budget is an organizational tool to help you identify how it is you want to spend your money, Douglas Boneparth, financial advisor and president of Bone Fide Wealth in New York City and co-author of “The Millennial Money Fix,” says.
This spending plan usually requires tracking two things: your after-tax income and the amount you’re shelling out each month.
At the most basic level, you want your monthly expenses, including savings deposits and debt payments, to amount to less than your take-home pay. After you’ve accomplished that, you can tweak your spending to achieve goals, pay off debt faster or buy yourself treats.
[READ: Easy Ways to Pay Off Debt.]
How to Make a Budget
According to Enright, making a budget starts with determining your short- and long-term goals. This can include everything from a purchase you want to make for your home to how much you want in savings when you retire.
“You’ll revisit and modify both goals and budget month to month, year to year, throughout life, but approaching budgeting this way will dramatically up the chances you’ll stick to the budget — and allow you to achieve your goals,” Enright says.
Calculate How Much ‘Money In’ You Have
After you’ve determined what’s important to build into your budget, the basics start with two things — money in and money out. The first step toward figuring out how much you can spend — and on what — will be determining your income.
“Add up all monthly net household income (the amount left after taxes and other paycheck deductions. This may include contributions to retirement plans and any medical insurance premiums you pay). The total is how much you have to spend each month,” Enright says.
Track Current Spending and Categorize
Once you know how much income you have to work with, get an idea of what your expenses are. Start by tracking current spending and categorizing all of your purchases.
“Put ongoing monthly expenses in four categories,” Enright says.
According to him, this includes fixed expenses like mortgage, rent, car and student loan payments. It also includes variable expenses that change each month but are “must buy” items like food, gas and medicine. Add in the amount you want to save and have for spending money. Last, add any additional debt payments you have like credit card debt.
Don’t forget to consider any expenses that don’t occur every month like insurance payments or annual membership fees. You’ll need to either build in a buffer to account for them the month they’re due or divide by 12 to include in your general monthly budget, Enright says.
Adjust Spending Targets by Category
When you’ve calculated all your money in and money out, you can start making adjustments. Many experts recommend following standard percentages for wants, needs and savings.
“A common rule of thumb is the 50-30-20 rule,” Kerrie Saephanh, founder and certified budget coach at Mindful Budgets, says.
“The idea is that you divide your net income into three categories, spending 50% on needs, 30% on wants and 20% on savings. Keep in mind that this is a generic rule meant to be a starting point, and these percentages will change based on your cost of living, goals and income level,” she adds.
But Saephanh points out that this rule of thumb won’t work for everyone, especially if you live in an area with a higher cost of living.
“Someone renting an apartment in Manhattan, for instance, will have a much higher percentage of income going toward rent than someone renting a similar-sized apartment in a small city in the Midwest,” Enright says.
Michael Collins, certified financial advisor and professor at Endicott College’s Curtis L. Gerrish School of Business in Beverly, Massachusetts, offers a breakdown with a bit more allocated for housing a bit less on savings: Allocate 40% for housing (including rent, mortgage, utilities, etc.), 10% for savings,10% for transportation (car payments, gas, etc.), 10% for food, 10% for entertainment, 10% for clothing and 10% for miscellaneous expenses.
You can use the expenses you’ve tracked to figure out what breakdown makes the most sense for you. Regardless, aim to put some money away toward an emergency fund each month and you should spend more on your needs than wants.
[READ: Be Ready for the Unexpected With an Emergency Fund.]
Review Your Budget Regularly
You’ll need to review your budget on a regular basis to ensure you’re meeting your goals. Can you afford to save a bit more? Are you regularly struggling to make ends meet with your current spending?
Enright recommends scheduling a regular time to review your budget at least once per month, though weekly or biweekly reviews can be helpful when you’re just getting started.
“If you’re part of a couple, make sure to set your goals and review the budget together. This avoids talking about the budget all the time, while ensuring dedicated time to maintain focus. You will find you’ll modify goals, income and expenses over time,” he says.
Budgeting Tools to Use
All of this might sound complicated, there are lots of tools you can use to track your budget.
Once you’ve set up your budget percentages, you can use a budgeting tool or app — like Mint, YNAB (You Need a Budget ) or Goodbudget — to help keep track of your spending.
“These tools help you track your spending, set up budget categories and receive helpful alerts when you’re overspending,” Collins says.
According to Saephanh, Mint is a great app for those getting started — it’s free and it automatically tracks your expenses when you connect to your bank accounts. She recommends graduating to YNAB as your needs get more complex.
If you’re very serious about making big changes in the way you manage your money, YNAB is a zero-based budgeting app that’s very popular in the personal finance community, Saephanh says.
“Though there is a bit of a learning curve, it’s a highly effective way of understanding where your money is going and making a plan for where you want it to go in the future,” she adds.
[READ: 10 Simple and Free Budgeting Tools.]
Tips for Sticking to Your Budget
“Sticking to a budget is the hardest part. Just like building any new habit, creating systems will set you up for success,” Saephanh says.
It’s easy to divide expenses into categories on paper, but actually changing your spending habits is a much bigger hurdle. Saephanh recommends new budgeters start small rather than trying to slash spending.
Other tips from experts to help you stick to your budget include:
— Use tools that are easy for you to understand: If your budgeting software requires a lot of math or data input, you’ll be less likely to stay on top of it. “Choose what’s most comfortable,” Enright says. Saephanh also recommends pinning your app to your phone or browser’s home page so it’s in front of you every day.
— Holding yourself accountable: “Start budgeting with a friend, find online communities to join budget challenges or hire a budget coach to set you up for success,” Saephanh says. This makes you accountable to stick to what you started.
— Pay with cash: While using a card to checkout can be easy and convenient, it doesn’t have the same emotional response as handing over cash, Enright says. He suggests trying to make your purchases with cash only for a month and see if you save any money.
— Make savings an expense in your budget: While saving 20% of your income might not be feasible for everyone, putting away money in case there’s an emergency is still critical. Enright recommends you build it into your budget as an expense so you treat it like the priority it is. When you treat savings like a bill you must pay you’re much likelier to actually do it, Enright says. “Leaving savings to ‘whatever’s leftover’ usually results in little to no savings,” he adds.
— Automate where you can: Many bank apps allow you to set automatic withdrawals to savings accounts. If your income comes in on a regular schedule, consider doing it so you don’t even have to think about moving money to savings.
Sticking to a budget comes down to finding what works for you. While some people thrive using spreadsheets and tracking every expense carefully, others work better with automated savings and tracking tools. The key to long-term budgeting is finding the best system for your personality and needs.
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How to Make a Budget and Stick to It originally appeared on usnews.com
Update 04/06/23: This story was published at an earlier date and has been updated with new information.
