If you want to get a hold on
your finances, you need to control your spending—and that starts with establishing a budget. Learn how to
create a budget, best practices for sticking to it, the latest budgeting software available to you, and
more.
Frequently Asked Questions
An individual's budget will vary depending on their lifestyle, spending habits, and net income.
To start a budget, you need to take a deep dive into how you spend your money, which includes
gathering all of your bills and pay stubs. When you have all of your bills and pay stubs, write
down all monthly expenses. Then, write down your monthly income. Subtract the expenses from how
much money you make. If the number is less than zero, you are spending more money than you make,
and it is time to reevaluate your spending and saving habits. A beginner can use a budgeting
spreadsheet, calculator, or various applications to assist in the process.
A personal or household budget is a financial summary that compares and tracks your income and
expenses for a defined period, typically one month at a time. Essentially, it is a written plan
for how you will spend your money. It allows you to make financial decisions ahead of time,
making it easier to cover all your expenses. It also helps you pay off debt, save for the
future, and be able to afford fun expenses. Budgeting consistently can help you turn your
finances around and start the process of
How much spending money you should have each month depends on you. However, to determine this
amount, you need to get a sense of how much you are spending per month compared to what you
earn. This way, you can set spending limits. The first step is to take a look at mandatory
expenses, then add them up and subtract the total from your income. The amount you have left is
what you can budget for discretionary expenses and savings goals. There are many different
budgeting strategies you can follow to determine how much you spend each month. Generally, what
you budget for expenses should not be more than your income; otherwise, you will end up in debt.
Each month, you’ll likely spend in three categories of expenses: fixed, variable, and
discretionary. Fixed expenses are necessary ongoing costs that don't change in amount or
frequency. Some examples include rent, health insurance, or a phone plan. Variable expenses are
still considered necessary costs, but the amount you spend changes every month. The amount you
spend on groceries or clothing each month can be considered variable expenses. Discretionary
expenses are those expenses that you desire and would like to have but do not necessarily need,
such as a dinner out at a restaurant or concert tickets.
The 50/30/20 rule of thumb is a way to allocate your budget according to three categories:
needs, wants, and financial goals. Through this strategy, 50% of your budget will go toward
needs, 30% will go toward wants, and 20% will be put away for financial goals. All of the
categories use your after-tax income.
While you can make a budget by hand or by using one of the many applications or software
available, a spreadsheet is one of the most effective ways to create a budget. To make a
spreadsheet, you must first download a software program such as Microsoft Excel. Then you’ll
need a list of fixed monthly expenses, variable monthly expenses, and income records for
everything you earn. Next, decide how you wish to organize your spreadsheet, whether that is by
including all information in one sheet or creating several tabs within the sheet. Then, track
your income sources as well as your expenses. Compare the two, and continue to track your
spending and saving habits within the sheet. There are also several premade sheets available
online if you do not wish to start from scratch.
Key Terms
Emergency Fund
An emergency fund is money you have set aside to cover any financial emergencies or
unexpected expenses that may come up. Those can include anything that you haven't planned
for, such as unexpected car repairs, medical bills, unemployment or other income loss,
property damage, or family emergencies.
